The cross-sectional regression technique of Fama and Macbeth (1973)is used in the Asset Pricing field to estimate risk premiums.

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The cross-sectional regression technique of Fama and MacBeth (1973)is used in the asset pricing field to estimate risk premiums.Companies are grouped in 20 portfolios sorted by size to reduce the effect of measurement errors.Five years of data are used to estimate the sensitivity of the monthly returns to the unexpected changes in economic variables.The sensitivities are then regressed against returns in cross-section regressions,one regression for each month in the year.The 12 cross-sectional regressions in each year provide 12 sets of risk premium estimates,which are grouped together year by year to create a time-series of risk premium estimates for the full sample period.

The Cross-Sectional Regression Technique of Fama and Macbeth (1973)is Used