I have built a Fama and French three factors model (market excess return, small-minus-big, high-minus-low) and estimated its betas through a time series regression (code in R, but any other language works fine too):
lm(return ~ market_excess_return + small_minus_big + high_minus_low, data = df)
Now I want to run a cross-sectional regression in Fama-MacBeth (1973) fashion.
I don't understand how to proceed with this. In particular, I understand that the previously estimated betas become new explanatory variables. But what is not clear to me is:
- is there any other explanatory variable?
- how to correctly specify the dependent variable?
Online I found the following but I don't know how to use it:
twof <- lm(returns ~ betas + factorbetas, data=sstage)
Appreciate your help.