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

Understand

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.