Fama and MacBeth regression with Shanken correction using asreg

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Fama and MacBeth regression with Shanken correction using asreg

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If you are not yet familiar with asreg, here is a quick start. Implementing the Fama and MacBeth regression using asreg is super-fast and easy. Here are a few posts related to this implementation.

FMB regressions with asreg

FMB regression – what, how and where

FMB regressions with 25-portfolios – An example


The 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 regressions are not fixed, of course, but are estimated in the time-series regression.  Therefore, there might be a sampling error in the estimates of β.  Shanken (1992) suggested a correction to the standard errors of the estimates.


How to do it?

The focus in this post is on the Fama and MacBeth implementation with Shanken () correction. Like with many other commands using asreg, the Shanken correction is fairly easy. The following steps are needed:


1. Find a covariance matrix among the right hand-side variables and write it to a matrix. Suppose variables inour dataset inlcude rm_rf smb and hml, then to find the covariance and write it to a matrix, we would do the following:

cor rm_rf smb hml, cov
matrix S = r(C)  


2. Find the first stage lambda of the RHS variables.

bys portfolios: asreg excess_returns rm_rf smb hml
* Remove uncessary variables
 drop _Nobs _R2 _adjR2 _b_cons 


3. Fama and MacBeth regression: In this last stage, we would use the fmb and shanken option. The shanken option requires the covariance matrix that we created in step 1 above

asreg excess_returns _b_mmrf _b_smb _b_hml , fmb shanken(S)

 
 

Pricing

The asreg program is a freeware and can be downloaded from SSC. The Shanken correction is available for $100/model, 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

 

See our full list of completed projects


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.



2 Comments

Sam

August 21, 2019at 2:02 am

Could you please kindly upload the example data used here? Many Thanks

    Attaullah Shah

    August 22, 2019at 12:48 pm

    Sam
    please note that the Shahnken plugin is a paid resource, available here. If you are interested in buying it, you shall get the example dataset and the plugin.

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