Sorting Out Sorts


  • Jonathan B. Berk

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    • University of California, Berkeley, and NBER. The ideas in this paper were first presented by the author as formal discussions at both the 1996 and 1997 meetings of the American Finance Association. The author thanks Kent Daniel, Wayne Ferson, Ken French, Cam Harvey, Jens Jackwerth, Raymond Kan, Bing Liang, Tim Loughran, Paul Malatesta, Sheridan Titman, the editor, and three anonymous referees for their comments on earlier drafts of this paper.


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.