NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Sorting Out Sorts

Jonathan B. Berk

NBER Technical Working Paper No. 235
Issued in September 1998

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.

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Document Object Identifier (DOI): 10.3386/t0235

Published: Journal of Finance, Vol. 55 (2000): 407-427.

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