# Fama and MacBeth Procedure

The Fama and MacBeth (1973) procedure is a two-step process. It involves estimation of N cross-sectional regressions in the first step. And then in the second step,  it requires calculation of T time-series averages of the coefficients of the N-cross-sectional regressions. The standard errors are adjusted for cross-sectional dependence. This is generally an acceptable solution when there is a large number of cross-sectional units and a relatively small time series for each cross-sectional unit. However, if both cross-sectional and time-series dependence are suspected in the data set, then adjusting standard errors merely for cross-sectional dependence will not be sufficient.

## Shanken Correction

In applying standard OLS formulas to a cross-sectional regression, we assume that the right-hand variables β are fixed. The β in the cross-sectional regression are not fixed, of course, but are estimated in the time-series regression.  Therefore, there might be sampling error in the estimates of β.  Shanken (1992) suggested a correction to the standard errors of the estimates. The code for Shanken correction is available for an additional fee of \$100

## Our Stata Code

We have developed easy to use yet robust codes for Fama and MacBeth procedure with Shanken correction.  The codes need just a basic understanding of Stata. Further, our comments on each line of code will surely help you to not only apply the code but also understand the process more clearly.

## Pricing

The code is available for \$ 100, plus a \$50 for raw data processing (in case the data is not in Stata format and variables are not already constructed). For further details, please contact us at:

attaullah.shah@imsciences.edu.pk
Stata.Professor@gmail.com

[vfb id=’2′]

References

1. Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: Empirical tests. Journal of political economy81(3), 607-636.
2. Shanken, J. (1992). On the estimation of beta-pricing models. The review of financial studies5(1), 1-33.