![]() ![]() The first step is to regress the return of every asset against one or more risk factors using a time-series approach. The aim of the model is to determine the risk premium associated with the exposure to these risk factors. The Fama-MacBeth two-step regression approach a practical way for measuring how correctly these risk factors explain asset or portfolio returns. ![]() These risk factors may be macroeconomic (such as consumer inflation or unemployment) or microeconomic (such as firm size or various accounting and financial metrics of the firms). Risk factors are frequently employed to explain asset returns in asset pricing theories. We conclude with a practical case study followed by a discussion on econometric issues. Then, we present the mathematical foundation that underpins their approach. This article is structured as follow: we introduce the Fama-MacBeth testing method. Energy, Trade & Finance, 2021-2022) presents the Fama-MacBeth two-step regression method used to test asset pricing models. In this article, Youssef Louraoui (Bayes Business School, MSc.
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