106 views

Uploaded by anishmenon

Presentation - Fama Macbeth presentation

- 14chkenblacksolution-130815163230-phpapp02
- Abdul Razak 2005 Cement and Concrete Research
- Regression
- Consumer Brand Choice towards Samsung smart Phone. Consumer Behavior Presentation
- Stats and Sampling
- Linear Regression Reading Material 1
- Social Security: apn
- AHU_1A
- ST3232Quiz2
- Solid Process Sampling
- Best Mcqs of Statics
- Volei in asezat
- 2004 Summer Homework7
- Ch17 Sample Size
- Static vs Dynamic Liking in Chewing Gum
- Aldous Et Al
- Regression
- Interpretation
- Lecture 17
- mating design

You are on page 1of 9

Anish S. Menon

Anish S. Menon

Fama Macbeth

1/9

Fama and Macbeth (1973) developed a method by which to test how risk

factors describe portfolio or asset returns. The main goal of the

Fama-Macbeth two step regression is to find the premium from exposure

to these factors.

Anish S. Menon

Fama Macbeth

2/9

more factor time series to determine how exposed it is to each one of

the factor exposures.

In the second step, the cross section of portfolio returns is regressed

against the factor exposures, at each time step, to give a series of risk

premia coefficients for each factor.

The insight of Fama-Macbeth is to then average these coefficients,

once for each factor, to give the premium expected for a unit

exposure to each risk factor over time.

Anish S. Menon

Fama Macbeth

3/9

In equation form, for n portfolio or asset returns and m factors, in the first

step, the factor exposure s are obtained by calculating n regressions, each

one on m factors (each equation in the following represents a regression).

R1,t = 1 + 1,F1 F1,t + 1,F2 F2,t + + 1,Fm Fm,t + 1,t

R2,t = 2 + 2,F1 F1,t + 2,F2 F2,t + + 2,Fm Fm,t + 2,t

..

.

Rn,t = n + n,F1 F1,t + n,F2 F2,t + + n,Fm Fm,t + n,t

(1)

where Ri,t is the return of the portfolio or asset i (n total) at time t, Fj,t

is the factor j (m total) at time t, i,Fm are the factor exposures, or

loadings, that describe how returns are exposed to the factors, and t goes

from time t through T . Notice that each regression uses the same factors

F , because the purpose is to determine the exposure of each portfolios

return to a given set of factors.

Anish S. Menon

Fama Macbeth

4/9

calculated from the first step.

on the m estimates of the s (call them )

Notice that each regression uses the same s from the first step, because

now the goal is the exposure of the n returns to the m factor loadings over

time (e.g., does a larger factor exposure mean a higher return?).

Anish S. Menon

Fama Macbeth

5/9

Ri,1 = 1,0 + 1,1 i,F1 + 1,2 i,F2 + + 1,m i,Fm + i,1

Ri,2 = 2,0 + 2,1 i,F1 + 2,2 i,F2 + + 2,m i,Fm + i,2

..

.

1

(2)

where the returns R are the same as those used in the first stage

regression, are regression coefficients that are used to calculate the risk

premium for each factor, and in each regression i goes, from 1 through n.

Anish S. Menon

Fama Macbeth

6/9

second step), for every factor, each of length T . If the are assumed

to be independently and identically distributed (i.i.d.), calculate the

risk premium m for factor Fm by averaging the mth over T , and

also get standard deviations and t statistics.

T

1 X

t

=

T

i =

Anish S. Menon

1

T

(3)

t=1

T

X

i,t

(4)

t=1

Fama Macbeth

7/9

T

1

1 X

(

) = var (

) = 2

(t )2

T

T

2

(5)

t=1

T

1 X

1

cov (

) = cov (t ) = 2

(

i,t i )(

j,t j )

T

T

(6)

t=1

This methodology ensures that the standard errors are corrected for

cross-sectional correlation. However it does not correct for time series

autocorrelation since it assumes that yearly estimates of the coefficients

are independent over time. A correction as proposed by Peterson(2009) is

to follow a double clustering methodology where there is clustering by

both firm and time.

Anish S. Menon

Fama Macbeth

8/9

t statistic =

m / T

(7)

The Fama Macbeth regression is a rolling regression.

Anish S. Menon

Fama Macbeth

9/9

- 14chkenblacksolution-130815163230-phpapp02Uploaded byengr
- Abdul Razak 2005 Cement and Concrete ResearchUploaded byBayu Panca
- RegressionUploaded byShyamsunder Singh
- Consumer Brand Choice towards Samsung smart Phone. Consumer Behavior PresentationUploaded byzordan
- Stats and SamplingUploaded byAhmed Kadem Arab
- Linear Regression Reading Material 1Uploaded byRishabh Gupta
- Social Security: apnUploaded bySocial Security
- AHU_1AUploaded byBalasubrahmanyam Chakravartula
- ST3232Quiz2Uploaded byasdfasdf
- Solid Process SamplingUploaded byAhmed Younis
- Best Mcqs of StaticsUploaded byBilal
- Volei in asezatUploaded byIonut Alexandru
- 2004 Summer Homework7Uploaded byM
- Ch17 Sample SizeUploaded by03322080738
- Static vs Dynamic Liking in Chewing GumUploaded byElson Tavares
- Aldous Et AlUploaded byAsit Dalai
- RegressionUploaded byhanik i
- InterpretationUploaded byDelwar-cox
- Lecture 17Uploaded byMilan Djordjevic
- mating designUploaded byTeflon Slim
- no 2Uploaded byMeylinda Dwi Anjarwati
- CF Assignment MaazUploaded byahmedmaaz892958
- Linear Regression in RUploaded byahcang
- finalExam-sample.pdfUploaded byEwunetu Liyew
- Bursa (Autosaved)Uploaded bythesaga
- Chandan Kumar 09Uploaded byChandan Sah
- Hasil Spss LogUploaded bydboysz
- TCS - NSE Valuation FileUploaded byshreyjain75
- Effects of Microfinance Institutions’ Products on Financial Performance of Small and Medium Enterprises; A Case of Machakos Town, KenyaUploaded byIOSRjournal
- mid1_Àú¹øÇÐ±â.pdfUploaded bysykim657

- Introductory econometrics test bankUploaded byJohn Deichen
- MBA-015 Business StatisticsUploaded byA170690
- Assignment 3Uploaded bypalak32
- Compilation 1Uploaded byAzman Al Aydeross
- SPSS OUTPUTUploaded bysaratkarvivek
- RCBDUploaded bySyra Salvador Narido
- SW_2e_ex_ch06Uploaded byccni
- hw6Uploaded byshoummow
- Tugas Uts KemoUploaded byNadya Aulia Rizki
- Econometrics_ch11Uploaded by3rlang
- Hasil Spss FerisUploaded byKethut Suswantoro
- Handout StructuralEquationModellingUploaded bysoumirai
- SEMs NotesUploaded byAnonymous gUySMcpSq
- HeteroskedasticityUploaded bySunny Singh
- garch modelUploaded byLavinia Ioana
- 13020214410008 Annisa Herdini Tugas 1Uploaded byBayu Dwi Ananta
- Intermediate Public EcoUploaded byelvinpaolo
- Harvard Ec 1123 Econometrics Problem Set 4 - Tarun Preet SinghUploaded bytarun singh
- Panel Data Notes GreeneUploaded byBenjamin Koh
- Simple Regression With SPSSUploaded byyazid_mrsmbp2000
- shewchuck_machlearnUploaded byGary Chen
- Stats 252Uploaded bycjsaiocsj
- Steps in Factor AnalysisUploaded bynantzsi
- Tutorial 2010 PCAUploaded byHarold Contreras
- Measures of AssociationUploaded byYugesh D PANDAY
- Advances in Data Analysis and ClassificationUploaded byLars Frteats
- IEEE Fuzzy_PCA-Guided_Robust_k-Means_Clustering-J1t.pdfUploaded byDexter Kamal
- ST350 NCSU Practice Problems Final ExamUploaded byvegantacocat
- ESTADOSTICAUploaded bySil Justiniano
- FFQ Gizi 2016 KomputasiUploaded byYulianti Wulan Sari