Characteristic-sorted portfolios: Estimation and inference

Matias D. Cattaneo, Richard K. Crump, Max H. Farrell, Ernst Schaumburg

Research output: Contribution to journalArticle

Abstract

—Portfolio sorting is ubiquitous in the empirical finance literature, where it has been widely used to identify pricing anomalies. Despite its popularity, little attention has been paid to the statistical properties of the procedure. We develop a general framework for portfolio sorting by casting it as a nonparametric estimator. We present valid asymptotic inference methods and a valid mean square error expansion of the estimator leading to an optimal choice for the number of portfolios. In practical settings, the optimal choice may be much larger than the standard choices of five or ten. To illustrate the relevance of our results, we revisit the size and momentum anomalies.

Original languageEnglish (US)
Pages (from-to)531-551
Number of pages21
JournalReview of Economics and Statistics
Volume102
Issue number3
DOIs
StatePublished - Jul 1 2020

All Science Journal Classification (ASJC) codes

  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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