The Replication Crisis in Finance

You may have heard of the Replication Crisis in medicine. Researchers have been unable to repeat the findings that were previously found in hundreds of academic papers. Robin Wigglesworth says there’s a similar crisis unfolding in finance:

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.

I can’t say I’m surprised. I’ve always been skeptical of the large databases of market performance. The historical data is pretty iffy.

The small-cap premium, for example, has struck me as probably bogus. Sure, it may have existed for a certain time period but doesn’t mean it’s a permanent effect.

I don’t trust much of the earnings numbers we see today, and modern accounting methods are much better than what we had decades ago.

Posted by on November 22nd, 2021 at 2:28 pm


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