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Easy · statistical_analysis · Quant Researcher interview question · statistics, fama-macbeth, factor-models, regression, numpy
The Fama-MacBeth (1973) two-pass regression is a standard method for testing asset pricing models and estimating risk premia. It involves a time-series regression for each asset to estimate its factor sensitivity (beta), followed by cross-sectional regressions for each time period to estimate the risk premium. This procedure is widely used in quantitative finance as it corrects for cross-sectional correlation in asset returns. Task Implement the function solution(returns: list, factor: list) ->