ABSTRACT
In this chapter, the authors present a simple implementation of Fama and MacBeth, a regression approach commonly called Fama-MacBeth regressions. Essentially, the two-step Fama-MacBeth regressions exploit a linear relationship between expected returns and exposure to (priced) risk factors. The basic idea of the regression approach is to project asset returns on factor exposures or characteristics that resemble exposure to a risk factor in the cross-section in each time period. Stocks with higher book-to-market ratios earn higher expected future returns, which is in line with the value premium. The negative value for log market capitalization reflects the size premium for smaller stocks.
