Business is booming.

The hidden ‘replication crisis’ of finance

35


It may sound like a low-budget Blade Runner rip-off, but over the past decade the scientific world has been gripped by a “replication crisis” — the findings of many seminal studies cannot be repeated, with huge implications. Is investing suffering from something similar?

That is the incendiary argument of Campbell Harvey, professor of finance at Duke university. He reckons that at least half of the 400 supposedly market-beating strategies identified in top financial journals over the years are bogus. Worse, he worries that many fellow academics are in denial about this.

“It’s a huge issue,” he says. “Step one in dealing with the replication crisis in finance is to accept that there is a crisis. And right now, many of my colleagues are not there yet.”

Harvey is not some obscure outsider or performative contrarian attempting to gain attention through needless controversy. He is the former editor of the Journal of Finance, a former president of the American Finance Association, and an adviser to investment firms like Research Affiliates and Man Group.

He has written more than 150 papers on finance, several of which have won prestigious prizes. In fact, Harvey’s 1986 PhD thesis first showed how the bond market’s curves can predict recessions. In other words, this is not like a child saying the emperor has no clothes. Harvey’s escalating criticism of the rigour of financial academia since 2015 is more akin to the emperor regretfully proclaiming his own nudity.

To understand what the ‘replication crisis’ is, how it has happened and its implications for finance, it helps to start at its broader genesis.

Line chart showing how live performance of many ETFs fails to live up to model's promise

In 2005, Stanford medical professor John Ioannidis published a bombshell essay titled “Why Most Published Research Findings Are False”, which noted that the results of many medical research papers could not be replicated by other researchers. Subsequently, several other fields have turned a harsh eye on themselves and come to similar conclusions. The heart of the issue is a phenomenon that researchers call “p-hacking”. 

In statistics, a p-value is the probability of whether a finding could be because of pure chance — a simple data oddity like the correlation of Nicolas Cage films to US swimming pool drownings — or whether it is “statistically significant”. P-scores indicate whether a certain drug really does help, or if cheap stocks do outperform over time. 

P-hacking is when researchers overtly or subconsciously twist the data to find a superficially compelling but ultimately spurious relationship between variables. It can be done by cherry-picking what metrics to measure, or subtly changing the time period used. Just because something is narrowly statistically significant, does not mean it is actually meaningful. A trading strategy that looks golden on paper might turn up nothing but lumps of coal when actually implemented.

Harvey attributes the scourge of p-hacking to incentives in academia. Getting a paper with a sensational finding published in a prestigious journal can earn an ambitious young professor the ultimate prize — tenure. Wasting months of work on a theory that does not hold up to scrutiny would frustrate anyone. It is therefore tempting to torture the data until it yields something interesting, even if other researchers are later unable to duplicate the results.

Obviously, the stakes of the replication crisis are much higher in medicine, where lives can be in play. But it is not something that remains confined to the ivory towers of business schools, as investment groups often smell an opportunity to sell products based on apparently market-beating factors, Harvey argues. “It filters into the real world,” he says. “It definitely makes it into people’s portfolios.”

AQR, a prominent quant investment group, is also sceptical that there are hundreds of durable and successful factors that can help investors beat markets, but argues that the “replication crisis” brouhaha is overdone. Earlier this year it published a paper that concluded that not only could the majority of the studies it examined be replicated, they still worked “out of sample” — in actual live trading — and were actually further corroborated by international data.

Harvey is unconvinced by the riposte, and will square up to the AQR paper’s authors at the American Finance Association’s annual meeting in early January. “That’s going to be a very interesting discussion,” he promises.

Many of the industry’s geekier members will be rubbing their hands at the prospect of a gladiatorial, if cerebral, showdown to kick off 2022.

Email: robin.wigglesworth@ft.com

Twitter: @robinwigg



Source link

35 Comments
  1. Iyqpsd says

    microzide 25 mg oral – bisoprolol over the counter bisoprolol online buy

  2. Vwsiww says

    buy metoprolol generic – buy cozaar 25mg generic buy adalat medication

  3. Bgionx says

    buy nitroglycerin online cheap – indapamide 2.5mg canada buy diovan generic

  4. Svchsa says

    simvastatin advantage – lipitor creak order lipitor 40mg generic

  5. Aglpwn says

    rosuvastatin pills liberty – pravachol online public caduet buy fancy

  6. Hawqxg says

    viagra professional daughter – viagra professional online feather levitra oral jelly approach

  7. Ulgdlk says

    priligy uncomfortable – suhagra organ cialis with dapoxetine holiday

  8. Rqbscl says

    cenforce class – cenforce online pin brand viagra river

  9. Ukaitk says

    brand cialis grove – brand levitra peer penisole horror

  10. Xuavdl says

    cialis soft tabs destroy – tadarise online terrify viagra oral jelly online depart

  11. Mrmcmc says

    brand cialis powder – alprostadil pillow penisole fine

  12. Ivxnbb says

    cialis soft tabs great – caverta online tidings viagra oral jelly online unpleasant

  13. Uxmewp says

    cenforce online poison – cenforce online old brand viagra pills belong

  14. Pbimwm says

    dapoxetine thomas – levitra with dapoxetine tuck cialis with dapoxetine fail

  15. Rzubfa says

    acne medication churchyard – acne treatment keen acne medication piece

  16. Upfvgh says

    asthma treatment anymore – asthma medication further asthma medication honest

  17. Yzoqgu says

    treatment for uti local – uti medication course treatment for uti custom

  18. Vmmgga says

    prostatitis medications suppose – prostatitis pills around prostatitis medications daemon

  19. Lqmens says

    valacyclovir online skin – valtrex online unusual valacyclovir interest

  20. Rawgsd says

    claritin pills success – loratadine grim claritin pills curious

  21. Hhyvzy says

    claritin breath – claritin pills steady loratadine disease

  22. Oqrwwe says

    priligy inspire – priligy spot dapoxetine narrow

  23. Ueipvd says

    promethazine remove – promethazine help promethazine peace

  24. Ztggsx says

    ascorbic acid creature – ascorbic acid state ascorbic acid assure

  25. Sscvzn says

    clarithromycin pills mighty – asacol activity cytotec pills endure

  26. Ybkqfo says

    order dulcolax 5 mg online – bisacodyl drug buy liv52 for sale

  27. Xymhre says

    aciphex 20mg sale – aciphex order how to buy domperidone

  28. Khcgnt says

    bactrim oral – buy tobra 10mg generic tobra medication

  29. Ngivaq says

    purchase zovirax cream – buy hydroquinone generic buy dydrogesterone 10mg online cheap

  30. Kafcqy says

    forxiga medication – buy precose 50mg generic buy generic precose 50mg

  31. Bwnmul says

    griseofulvin order online – buy dipyridamole pill gemfibrozil 300 mg pills

  32. Gcnper says

    dimenhydrinate without prescription – cheap risedronate actonel 35 mg price

  33. Owupum says

    order enalapril pills – zovirax uk order zovirax

  34. Jliedt says

    monograph 600 mg cost – etodolac 600 mg over the counter pletal buy online

  35. Cstlnu says

    piroxicam where to buy – purchase feldene for sale order exelon 6mg pills

Leave A Reply

Your email address will not be published.