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Rev Fin 1990; 3:431-467
© 1990 the Society for Financial Studies

Article

Data-snooping biases in tests of financial asset pricing models

AW Lo1 and AC MacKinlay2
1 Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02139, USA
2 Wharton School, University of Pennsylvania, Philadelphia, USA

Abstract

Tests of financial asset pricing models may yield misleading inferences when properties of the data are used to construct the test statistics. In particular, such tests are often based on returns to portfolios of common stock, where portfolios are constructed by sorting on some empirically motivated characteristic of the securities such as market value of equity. Analytical calculations, Monte Carlo simulations, and two empirical examples show that the effects of this type of data snooping can be substantial.


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