  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.
