Sorting Out Sorts
Technical Working Paper 0235
DOI 10.3386/t0235
Issue Date
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.
Published Versions
Journal of Finance, Vol. 55 (2000): 407-427.