The Fama-Macbeth regression is a method used to estimate parameters for asset pricing models such as the Capital asset pricing model (CAPM). In Finance, the Capital Asset Pricing Model ( CAPM) is used to determine a theoretically appropriate required Rate of return of an Asset, The method estimates the betas and risk premia for any risk factors that are expected to determine asset prices. The beta coefficient, in terms of Finance and investing, describes how the expected return of a Stock or portfolio is correlated to the A risk premium (plural risk premia) is the minimum difference a person requires to be willing to take an uncertain Bet, between the expected value of the bet and the A risk factor is a variable associated with an increased risk of Disease or Infection. The method works with multiple assets across time (panel data). In Statistics and Econometrics, the term panel data refers to two-dimensional data The parameters are estimated in two steps:
- First regress each asset against the proposed risk factors to determine that asset's beta for that risk factor.
- Then regress all asset returns for a fixed time period against the estimated betas to determine the risk premium for each factor.
References
- EconTerms - Glossary of Economic Research "Fama-MacBeth Regression". Retrieved on --02:38, 2 November 2006 (UTC).
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