A weighted Fama-MacBeth two-step panel regression procedure: asymptotic properties, finite-sample adjustment, and performance
Studies in Economics and Finance
ISSN: 1086-7376
Article publication date: 29 May 2020
Issue publication date: 23 September 2020
Abstract
Purpose
In a recent paper, Yoon and Lee (2019) (YL hereafter) propose a weighted Fama and MacBeth (FMB hereafter) two-step panel regression procedure and provide evidence that their weighted FMB procedure produces more efficient coefficient estimators than the usual unweighted FMB procedure. The purpose of this study is to supplement and improve their weighted FMB procedure, as they provide neither asymptotic results (i.e. consistency and asymptotic distribution) nor evidence on how close their standard error estimator is to the true standard error.
Design/methodology/approach
First, asymptotic results for the weighted FMB coefficient estimator are provided. Second, a finite-sample-adjusted standard error estimator is provided. Finally, the performance of the adjusted standard error estimator compared to the true standard error is assessed.
Findings
It is found that the standard error estimator proposed by Yoon and Lee (2019) is asymptotically consistent, although the finite-sample-adjusted standard error estimator proposed in this study works better and helps to reduce bias. The findings of Yoon and Lee (2019) are confirmed even when the average R2 over time is very small with about 1% or 0.1%.
Originality/value
The findings of this study strongly suggest that the weighted FMB regression procedure, in particular the finite-sample-adjusted procedure proposed here, is a computationally simple but more powerful alternative to the usual unweighted FMB procedure. In addition, to the best of the authors’ knowledge, this is the first study that presents a formal proof of the asymptotic distribution for the FMB coefficient estimator.
Keywords
Acknowledgements
The authors thank the Editor, Professor Niklas Wagner, and two anonymous reviewers for their valuable comments that helped improve the paper.
This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2018S1A5A2A02070046).
Citation
Lee, K. (2020), "A weighted Fama-MacBeth two-step panel regression procedure: asymptotic properties, finite-sample adjustment, and performance", Studies in Economics and Finance, Vol. 37 No. 2, pp. 347-360. https://doi.org/10.1108/SEF-08-2019-0322
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited