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Sorting Out Sorts
Author(s) -
Berk Jonathan B.
Publication year - 2000
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00210
Subject(s) - sorting , sort , explanatory power , computer science , asset (computer security) , capital asset pricing model , econometrics , group (periodic table) , mathematical economics , economics , operations research , microeconomics , algorithm , engineering , computer security , database , philosophy , chemistry , organic chemistry , epistemology
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 bias in favor of rejecting the model under consideration. By simply picking enough groups to sort into, the true asset pricing model can be shown to have no explanatory power within each group.