A Factor-Adjusted Multiple Testing Procedure With Application to Mutual Fund Selection

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)147-157
Journal / PublicationJournal of Business & Economic Statistics
Issue number1
Online published31 Jul 2018
Publication statusPublished - Jan 2019
Externally publishedYes


In this article, we propose a factor-adjusted multiple testing (FAT) procedure based on factor-adjusted p-values in a linear factor model involving some observable and unobservable factors, for the purpose of selecting skilled funds in empirical finance. The factor-adjusted p-values were obtained after extracting the latent common factors by the principal component method. Under some mild conditions, the false discovery proportion can be consistently estimated even if the idiosyncratic errors are allowed to be weakly correlated across units. Furthermore, by appropriately setting a sequence of threshold values approaching zero, the proposed FAT procedure enjoys model selection consistency. Extensive simulation studies and a real data analysis for selecting skilled funds in the U.S. financial market are presented to illustrate the practical utility of the proposed method. Supplementary materials for this article are available online. ©2019 American Statistical Association.