errors-in-variables and shanken's (1992) correction

Econometrics questions and discussions

errors-in-variables and shanken's (1992) correction

Unread postby fan » Thu Apr 18, 2019 4:19 am

Dear Tom and all,

I am running two-pass regression to test the FF 3-factor model. Since the betas are estimated from the time-series regression, the first pass, they represent generated regressor in the cross-section regression, the second pass. This is the classical errors-in-variables problem. I would like to how I use Shanken's correction to adjust for the overstated precision of the Fama-MacBeth standard errors. Thank you in advance

Here are the codes for two-pass regression. Special thanks to Tom!
Code: Select all

dec vect[series] betas(3)
dec series avgret
clear(zeros) betas avgret
*
* Do time series regressions for each portfolio, saving the mean return (into
* avgret) and the coefficients on the factors (into BETAS).
*
compute port=0
dofor s = sl to bh
   linreg s
   # constant mktrf smb  hml   
   compute port=port+1
   compute %pt(betas,port,%xsubvec(%beta,2,4))
   compute avgret(port)=%mean
end dofor s
*
* Run the cross section regression across portfolios
*
linreg avgret 1 port
# betas



fan
 
Posts: 215
Joined: Wed Jun 19, 2013 5:14 pm

Re: errors-in-variables and shanken's (1992) correction

Unread postby fan » Wed Aug 21, 2019 6:33 pm

Hi Tom,

Could you please kindly show me how to solve error-in-variables by shaken's correction in Rats. I searched many places but found no related examples.
fan
 
Posts: 215
Joined: Wed Jun 19, 2013 5:14 pm


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