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.
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Optimal group size in microlending
Microlending, where a bank lends to a small group of people without credit histories,
began with the Grameen Bank in Bangladesh, and is widely seen as the creation of
Muhammad Yunus, who received the Nobel Peace Prize in recognition of his largely
successful efforts. Since that time the modeling of microlending has received a fair
amount of academic attention. One of the issues not yet addressed in full detail,
however, is the issue of the size of the group. Some attention has nevertheless been paid
using an experimental and game theory approach. We, instead, take a mathematical
approach to the issue of an optimal group size, where the goal is to minimize the
probability of default of the group. To do this, one has to create amodel with interacting
forces, and to make precise the hypotheses of the model. We show that the original
choice of Muhammad Yunus, of a group size of five people, is, under the right, and,
we believe, reasonable hypotheses, either close to optimal, or even at times exactly
optimal, i.e., the optimal group size is indeed five people.
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- Award ID(s):
- 2106433
- NSF-PAR ID:
- 10509910
- Publisher / Repository:
- Annals of Finance
- Date Published:
- Journal Name:
- Annals of Finance
- Volume:
- 18
- Issue:
- 1
- ISSN:
- 1614-2446
- Page Range / eLocation ID:
- 121 to 132
- Subject(s) / Keyword(s):
- Group lending, microlending, optimal group size
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
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- Free Publicly Accessible Full Text
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Accepted Manuscript1.0
- Journal Article:
- https://doi.org/10.1007/s10436-020-00382-0
