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Re: st: Fama-MacBeth regressions

From   Stas Kolenikov <[email protected]>
To   [email protected]
Subject   Re: st: Fama-MacBeth regressions
Date   Tue, 12 Oct 2004 12:37:51 -0400

On Tue, 12 Oct 2004 11:32:48 -0400, Subhankar Nayak <[email protected]> wrote:
> Fama-Macbeth approach is an innovative two-stage approach meant to minimize
> within-portfolio variance while capturing the across-portfolio
> characteristics...
> Their 1974 paper is not a landmark in terms of econometric modelling, but
> the approach is nice.
> Their approach is meant to test Capital Asset Pricing Model (CAPM).

[explanations absorbed; a couple of questions remained]

1. Looks like there is quite a bit of arbitrary tune up: why 24
months? why 10 portfolios?

2. Are the standard errors corrected for the multi-stage estimation?
You can still cast this problem in terms of linear filtering of the
original data, as all of the testable coefficients should be linear
functions of the original prices. Hence you can come up with correct
standard errors just by the virtue of this linearity. (Am I missing
something?) The standard errors that come out of the last regression
may be wrong by a factor of 5 or so.

You or Michael may comfort me on this though, as I am not familiar
with the area (but curious to learn something new if this does not
take too much of your time :))

Stas Kolenikov
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