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Article

Analyzing the Performance of Multifactor Investment Strategies under a Multiple Testing Framework

Kendro Vincent, Yu-Chin Hsu and Hsiou-Wei Lin
The Journal of Portfolio Management Quantitative Special Issue 2018, 44 (4) 113-126; DOI: https://doi.org/10.3905/jpm.2018.44.4.113
Kendro Vincent
is a postdoctoral fellow in the Institute of Economics at Academia Sinica in Taipei, Taiwan
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Yu-Chin Hsu
is an associate research fellow in the Institute of Economics at Academia Sinica in Taipei, Taiwan, and an associate professor in the Department of Finance at National Central University in Taoyuan, Taiwan
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Hsiou-Wei Lin
is a professor in the Department of International Business at the National Taiwan University in Taipei, Taiwan, and Tunghai University in Tunghai, Taiwan
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Abstract

Evaluating portfolios based on numerous combinations of factors using the individual backtesting method could suffer from serious data mining bias and lead to spurious significant findings. Accordingly, the authors employ a multiple hypothesis testing method to examine the multifactor portfolio’s performance. Their empirical results show that even after they adjust for the multiple comparisons bias, stock-picking strategies with certain combined firm characteristics could generate significantly better liquidity risk–adjusted returns. In addition, the outperforming multifactor strategies that the authors report are robust to alternative definitions of factors. However, they observe that the number of significantly profitable multifactor portfolios has decreased substantially in the era of increased liquidity and trading activity in the U.S. stock market.

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The Journal of Portfolio Management: 44 (4)
The Journal of Portfolio Management
Vol. 44, Issue 4
Quantitative Special Issue 2018
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Analyzing the Performance of Multifactor Investment Strategies under a Multiple Testing Framework
Kendro Vincent, Yu-Chin Hsu, Hsiou-Wei Lin
The Journal of Portfolio Management Mar 2018, 44 (4) 113-126; DOI: 10.3905/jpm.2018.44.4.113

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Analyzing the Performance of Multifactor Investment Strategies under a Multiple Testing Framework
Kendro Vincent, Yu-Chin Hsu, Hsiou-Wei Lin
The Journal of Portfolio Management Mar 2018, 44 (4) 113-126; DOI: 10.3905/jpm.2018.44.4.113
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  • Article
    • Abstract
    • OVERVIEW OF MULTIPLE TESTING
    • MEASURING PORTFOLIO PERFORMANCE
    • DATA AND PORTFOLIO CONSTRUCTION
    • EMPIRICAL ANALYSES
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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