Methodological uncertainty in portfolio sorts

83 Pages Posted: 25 Jul 2022 Last revised: 29 Dec 2023

See all articles by Dominik Walter

Dominik Walter

Vienna Graduate School of Finance (VGSF)

Rüdiger Weber

WU Vienna; Vienna Graduate School of Finance (VGSF)

Patrick Weiss

Reykjavik University

Date Written: December 14, 2023

Abstract

Systematically studying methodological variation in portfolio sorts reveals four key insights. (1) The average monthly non-standard error is 0.19% and exceeds standard errors. Despite this considerable variation, estimated premia are robust regarding their sign, statistical significance, and monotonicity. This alleviates concerns about replicability. (2) Decisions such as excluding firms with negative earnings or the information lag have an impact comparable to size-related choices. (3) Methodological choices induce not just orthogonal noise but add predictably non-zero returns of unclear origin. (4) To address methodological uncertainty, we propose a two-step protocol adaptable to economic motivations, for which we provide an open-source tool.

Keywords: Non-standard errors, portfolio sorts, data mining, p-hacking, risk factors, anomalies

JEL Classification: C58, G10, G11, G12, G14

Suggested Citation

Walter, Dominik and Weber, Rüdiger and Weiss, Patrick, Methodological uncertainty in portfolio sorts (December 14, 2023). Available at SSRN: https://ssrn.com/abstract=4164117 or http://dx.doi.org/10.2139/ssrn.4164117

Dominik Walter

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Rüdiger Weber

WU Vienna ( email )

Welthandelsplatz 1 1
Wien, 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Patrick Weiss (Contact Author)

Reykjavik University ( email )

Menntavegur 1
Reykjavik, 102
Iceland

HOME PAGE: http://https://sites.google.com/view/patrick-weiss

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