Interpreting Fama–MacBeth Tests of the CAPM

Summary

This document asks how to interpret Fama–MacBeth regressions used to assess whether a six-factor asset-pricing model predicts expected returns. It contrasts a single-factor specification, where the average intercept and market slope are reported as significant, with a multivariate specification that adds the Fama–French and Carhart factors. In the latter, the variables are described as insignificant while the intercept remains significant.

The central questions are whether a significant intercept counts against the CAPM and why the market coefficient’s significance changes after adding factors. The document supplies reported regression outcomes but no explanation, sample details, coefficient estimates, or inference procedure. It therefore frames an interpretation problem rather than providing a resolution. Results alone do not establish whether model restrictions such as a zero pricing error or a unit market price of risk hold; those claims require appropriate tests and careful attention to how the Fama–MacBeth stages and standard errors are defined.

Key ideas

• The document compares single-factor and multifactor Fama–MacBeth regression results.
• A significant average intercept motivates a question about whether CAPM pricing restrictions hold.
• The market coefficient is reported significant in the simple model but insignificant after adding other factors.
• The document poses interpretation questions without supplying estimates or resolving them.

Tags

# CAPM and the Fama-MacBeth (1973)


# CAPM and the Fama-MacBeth (1973)












I need to conduct the Fama-MacBeth (FM) procedure for my thesis to test the ability of the six-factor model to predict future expected returns. In univariate regressions of expected excess returns on the market excess return, both average intercept and slope coefficients are statistically significant at the 1% level. When augmenting the regression model with the FF (2015) and Carhart (1997) factors, all variables are insignificant, but the intercept coefficient remains highly significant at the 1% level.

Basically, what I need to know is whether the CAPM holds. I know that, in a cross-sectional OLS setup, the intercept has to be statistically irrelevant and close to zero (α = 0), while the coefficient on the market excess return should be statistically significant and close to one (β = 1). However, I'm a bit confused as to how FM regression results are supposed to be interpreted.

Two questions:

- What does the significant intercept in the CAPM regression exactly mean in the FM approach? Does it imply that the CAPM fails?

- What is the reason for beta to be significant in the simple regression, but insignificant in the multivariate specification?

Any help is much appreaciated! Thank you in advance.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.