Abstract:

The fragility of the CAPM has led to a resurgence of research that frequently uses trading strategies based on sorting procedures to uncover relations between firm characteristics (such as “value” or “glamour”) and equity returns. We examine the propensity of these strategies to generate statistically and economically significant profits due to our familiarity with the data. Under plausible assumptions, data snooping can account for up to 50 percent of the in-sample relations between firm characteristics and returns uncovered using single (one-way) sorts. The biases can be much larger if we simultaneously condition returns on two (or more) characteristics.

Document Type: Research article

DOI: 10.1111/1540-6261.00594

Affiliations: 1: Kennan-Flagler Business School 2: Krannert Graduate School of Management 3: University of Michigan Business School