I get the first part of the regression, basically it is a time series regression of returns on the proposed factors.
So, I need to run the regression of monthly return on the monthly time series of the factors from 2000 to 2005. So from this, we get the alpha and beta for this stock from the period 2000 to 2005. Now, let’s say we have 10 stocks, so we have 10 alphas and 10 betas.
Now, the part I don’t get is the second part, the cross section regression.
I don’t understand the dependent variables for this regression.
So, do I regress the monthly return of each stock on its beta over and over again? Because for each stock we have one beta and one alpha, so each month from 2000 to 2005, do I run a regression of each stock on its beta? This beta from that time period won’t be changing though?