Second pass regression

Second pass regression

A cross-sectional regression of portfolio returns on betas. The estimated slope is the measurement of the reward for bearing systematic risk during the period analyzed.
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Estimating Security Market Line is a cross sectional regression procedure in testing linearity of risk and return so called second pass regression.
To test second pass regression (5) null hypotheses, we simple employ t-test as follows:
Second pass regression (5) results do not support well the linear relationship between average excess return which is used as a proxy for expected excess return and ex-post betas within the estimation period (in theory ex-ante betas are linked with expected return).
a) monthly returns extracted from the SES Journal from the immediately post reform period of the SES, covering 1986-1993, b) first pass time-series regression as in equation (III-3) to estimate beta, second pass regression, if necessary, to find the values of [[eta].
They are done on a yearly basis all the time, except when the work involves the second pass regression.
Therefore my methodology to use T-test in place of the time-series second pass regression should produce results that are closer to the real situations with no more statistical problem.
The second pass regression estimates Equation 1, now including the off board volume variable, using the specialist-dominated and then the limit-order-dominated samples determined in the first pass regression.
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