Fama-MacBeth Procedure for multiple independent variables.
Hope the question qualifies to be included here.
Sure you are aware that Fama-MacBeth (1973) two-step procedure involves:1. Regressing time series of each decile of y on time series of each decile of x, resulting in 10 slopes.2. Regressing cross-section of decile 1-10 of y over slopes obtained in step-1, for each month.3. Obtaining time-series of slopes in step-2 and then testing for its significance.
Now say y is return and x is VaR. Deciles of xs were created based on decreasing VaR and corresponding decile returns were ys.
Issue is what if i wish to add another x (say x1 and x2 now) and implement Fama-MacBeth procedure? How then the deciles will be formed, basis x1 or x2 or both? Can someone help along with R-code too?
Regards,Pankaj K Agarwal