Abstract
The empirical three-step, cross-sectional regression method of Fama and MacBeth [9] (FM) used classical ordinary least squares regression, averages, and t-statistics to reach its conclusions. Unfortunately, averages and t-statistics, taken over different volatility regimes and fractions of outlying data, can be severely biased. This paper replicates and extends FM's results to recent time periods, analyzes the choice of time period, and replaces the classical estimators with a theoretically well-justified robust estimator in various parts of the three-step approach. While FM's conclusions on non-linearity and non-beta related risk could be confirmed, the conclusions of having, on average, a positive risk and return trade-off could not be confirmed.
Get full access to this article
View all access options for this article.