Data-Snooping Biases in Tests of Financial Asset Pricing Models Andrew W.Lo Sloan School of Management Massachusetts Institute of Technology A.Craig MacKinlay Wharton School University of Pennsylvania Tests of financial asset pricing models may yield misleading inferences wben properties of tbe data are used to construct the test statistics.In partic- ular,sucb tests are often based on returns to port- folios of common stock,wbere portfolios are con- structed by sorting on some empirically motivated cbaracteristic of tbe securities such as market value ofequity.Analytical calculations,Monte Carlo sim- ulations,and two empirical examples sbow that the effects of tbis type of data snooping can be substantial. The reliance of economic science upon nonexperi- mental inference is,at once,one of the most chal- lenging and most nettlesome aspects of the disci. pline.Because of the virtual impossibility of controlled experimentation in economics,the importance of sta- Research support from the Batterymarch Fellowship (Lo),the Geewax-Ter- ker Research Fund (MacKinlay),the John M.Olin Fellowship at the National Bureau of Economic Research (Lo),and the National Science Foundation (SES-8821583)is gratefully acknowledged.We thank David Aldous,Cliff Ball,Michael Brennan,Herbert David,Mike Gibbons,Jay Shanken,a referee, and seminar participants at the Board of Governors of the Federal Reserve, Boston College,Columbia,Dartmouth,Harvard,M.I.T.,Northwestern, Princeton,Stanford,University of Chicago,University of Michigan,University of Wisconsin at Madison,Washington University,and Wharton for useful comments and suggestions.Address reprint requests to Andrew Lo,Sloan School of Management,M.I.T.,50 Memorial Drive,Cambridge,MA 02139. Tbe Review of Financial Studies 1990 Volume 3,number 3,pp.431-467 1990 The Review of Financial Studies 0893-9454/90/$1.50