Are There Sectoral Anomalies Too? The Pitfalls of Unreported Multiple Hypothesis Testing and a Simple Solution

Are There Sectoral Anomalies Too? The Pitfalls of Unreported Multiple Hypothesis Testing and a... The recent emphasis on sector-specific investment strategies has led to the emergence of industry-specific calendar anomalies, notably the technology sector “summer swoon”. A standard t-test implies that these price movements provide arbitrage opportunities. However, this test fails to account for the many tests that may have preceded the swoon’s discovery. We propose the use of the Bonferroni correction to account for this unreported testing. Its application reverses the conclusions about the summer swoon and finds no evidence of calendar-based price patterns in any other sector. We also use the Bonferroni correction to revisit previously documented, market-wide, anomalies. Conclusions about the most widely cited anomalies (e.g., the January effect) are unchanged, but evidence for some other “anomalies” is substantially weakened. Our results emphasize that in evaluating a proposed anomaly, sectoral in nature or otherwise, it is crucial to account for the hypotheses that were likely to have been tested but not reported. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Are There Sectoral Anomalies Too? The Pitfalls of Unreported Multiple Hypothesis Testing and a Simple Solution

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2000 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008313703909
Publisher site
See Article on Publisher Site

Abstract

The recent emphasis on sector-specific investment strategies has led to the emergence of industry-specific calendar anomalies, notably the technology sector “summer swoon”. A standard t-test implies that these price movements provide arbitrage opportunities. However, this test fails to account for the many tests that may have preceded the swoon’s discovery. We propose the use of the Bonferroni correction to account for this unreported testing. Its application reverses the conclusions about the summer swoon and finds no evidence of calendar-based price patterns in any other sector. We also use the Bonferroni correction to revisit previously documented, market-wide, anomalies. Conclusions about the most widely cited anomalies (e.g., the January effect) are unchanged, but evidence for some other “anomalies” is substantially weakened. Our results emphasize that in evaluating a proposed anomaly, sectoral in nature or otherwise, it is crucial to account for the hypotheses that were likely to have been tested but not reported.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 8, 2004

References

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