# Fama MacBeth 2 step regression (2nd part)

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?

• Fama-MacBeth ran the cross-sectional regression with a different period from that which was used to obtain the individual stock betas. So, for example, they would use 2000 - 2003 to estimate $\beta$, and then 2004 - 2005 to run the cross-sectional regressions with the $\beta$ from the earlier period. This avoids the influence of the estimation error for $\beta$ on the final results. There are all sorts of minor variants of this approach. Jun 24 '20 at 14:23