publication . Article . Report . Preprint . 1998

Sorting Out Sorts

Jonathan B. Berk;
  • Published: 01 Sep 1998 Journal: The Journal of Finance, volume 55, pages 407-427 (issn: 0022-1082, Copyright policy)
  • Publisher: Wiley
In this paper we analyze the theoretical implications of sorting data into groups and then running asset pricing tests within each group. We show that the way this procedure is implemented introduces a severe bias in favor of rejecting the model under consideration. By simply picking enough groups to sort into even the true asset pricing model can be shown to have no explanatory power within each group.
free text keywords: Asset (economics), Sorting, Explanatory power, Basis risk, Economics, Capital asset pricing model, Consumption-based capital asset pricing model, Investment theory, Financial economics, Finance, business.industry, business, Arbitrage pricing theory, jel:G12, jel:C22
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