Non-Standard Errors in Asset Pricing: Mind Your Sorts

82 Pages Posted: 24 Jun 2022 Last revised: 28 Nov 2022

See all articles by Amar Soebhag

Amar Soebhag

Erasmus University Rotterdam (EUR) - Department of Business Economics; Robeco Asset Management

Bart van Vliet

Robeco Quantitative Investments; Erasmus University Rotterdam (EUR)

Patrick Verwijmeren

Erasmus University Rotterdam (EUR)

Date Written: June 14, 2022

Abstract

Non-standard errors capture uncertainty due to differences in research design choices. We establish considerable variation in the design choices made by researchers when constructing asset pricing factors. By purposely data mining over two thousand different versions of each factor, we find that Sharpe ratios vary substantially within a factor due to different construction choices, which results in sizable non-standard errors. We provide simple suggestions that reduce the average non-standard error by 70%. Our study has important implications for model selection exercises.

Keywords: portfolio construction, factor investing, equity factors, asset pricing models, non-standard errors, p-hacking, data-mining.

JEL Classification: G11, G12, G15

Suggested Citation

Soebhag, Amar and van Vliet, Bart and Verwijmeren, Patrick, Non-Standard Errors in Asset Pricing: Mind Your Sorts (June 14, 2022). Available at SSRN: https://ssrn.com/abstract=4136672 or http://dx.doi.org/10.2139/ssrn.4136672

Amar Soebhag (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Business Economics ( email )

Netherlands

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

Bart Van Vliet

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3011 AG
Netherlands

Erasmus University Rotterdam (EUR)

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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