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(20 points) The following questions are regarding the Fama-Macbeth regression: A (15 points) Suppose that you have the data of stock returns on 2000 stocks
(20 points) The following questions are regarding the Fama-Macbeth regression: A (15 points) Suppose that you have the data of stock returns on 2000 stocks since in a market (1000 since 01/1990 and another 1000 since 01/2000), the risk-free rates, and market returns from 01/1990 to 12/2019. All data are on the monthly basis. Now, you have an assignment to examine the explanatory power of the idiosyncratic volatility for individual stock returns, applying the Fama-Macbeth regressions. The idiosyncratic volatility (the standard deviation of the residuals under the CAPM) are estimated using the past 3- year monthly returns, with at least 12 observations. Describe EVERY detail of your steps. Remember to mention the numbers of required regressions and observations in each step.) (20 points) The following questions are regarding the Fama-Macbeth regression: A (15 points) Suppose that you have the data of stock returns on 2000 stocks since in a market (1000 since 01/1990 and another 1000 since 01/2000), the risk-free rates, and market returns from 01/1990 to 12/2019. All data are on the monthly basis. Now, you have an assignment to examine the explanatory power of the idiosyncratic volatility for individual stock returns, applying the Fama-Macbeth regressions. The idiosyncratic volatility (the standard deviation of the residuals under the CAPM) are estimated using the past 3- year monthly returns, with at least 12 observations. Describe EVERY detail of your steps. Remember to mention the numbers of required regressions and observations in each step.)
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