The Link between Fama-French Time-Series Tests and Fama-Macbeth Cross-Sectional Tests

ArXiv ID: ssrn-1271935 “View on arXiv”

Authors: Unknown

Abstract

Many papers in the empirical finance literature implement tests of asset pricing models either via Fama-French time-series regressions or via Fama-Macbeth cros

Keywords: Asset Pricing Models, Fama-French Regressions, Fama-MacBeth Regressions, Empirical Finance, Cross-Sectional Returns, Equity

Complexity vs Empirical Score

• Math Complexity: 3.5/10
• Empirical Rigor: 8.0/10
• Quadrant: Street Traders
• Why: The paper’s mathematical framework relies on established econometric and asset pricing models, which are advanced but not unusually dense; however, it heavily emphasizes empirical implementation, using real financial data and detailed testing methodologies.

  flowchart TD
    A["Research Goal:<br>Test Asset Pricing Models"] --> B{"Choose Methodology"}
    B --> C["Fama-French Time-Series<br>Regressions"]
    B --> D["Fama-MacBeth Cross-Sectional<br>Regressions"]
    
    C --> E["Input: Time-Series Data<br>Portfolio Returns & Factors"]
    E --> F["Compute: Regression<br>R_it - R_ft = α_i + β_i<br>Factor_t + ε_it"]
    
    D --> G["Input: Cross-Sectional Data<br>Cross-Section of Returns<br>at Each Time t"]
    G --> H["Compute: Regress Returns<br>on Risk Factors<br>Across Assets at Each t"]
    
    F --> I["Key Finding:<br>Link & Equivalence<br>Under Null Hypothesis"]
    H --> I
    
    style A fill:#e1f5fe
    style I fill:#f3e5f5