Abstract
The selection of methodological alternatives in asset pricing analysis can serve to significantly alter the interpretation and possibly the statistical inference of empirical results. We examine the statistical and economic impact of subtle yet important changes to the methodological design of an important empirical study. We select the pricing of idiosyncratic volatility as our test model, and we find that equally valid test designs can generate significantly different results and conclusions. We estimate monthly alphas for portfolios sorted by idiosyncratic volatility and find a set of plausible monthly alphas that range from ‑1.478% to +0.044%. We expound upon the challenges posed to researchers by the effects of methodological test design alternatives on inference.
Recommended Citation
Followill, Richard; Olsen, Brett C.; and Smedema, Adam
(2017)
"The Importance of Empirical Research Design in Asset Pricing,"
Journal of Business, Industry, and Economics: Vol. 22, Article 1.
Available at:
https://roar.una.edu/jobie/vol22/iss1/1