The aim of this paper is to identify the pricing factor structure of Italian eq- uity returns. The Italian Stock Market is characterized mainly by small quoted firms. Small stocks have higher beta but beta differences are not enough to ex- plain returns differences. We investigate how these differences can be explained by other factors like size, value and momentum. A two step empirical analysis is provided where first we estimate an unrestricted multi-factor model to test if there is any evidence of mispecification. Secondly, we estimate the restricted model, with pricing errors equal to zero, through the Generalized Methods of Moments (GMM). In accordance with the main literature (see e.g. Fama and French 1992, 1993) we find that the size premium for stocks is confirmed for a domestic Italian investor. On the contrary the value premium is statistically weakly different from zero. Finally, augmenting the model with a momentum factor does not improve its performance.
An Empirical Investigation of the Italian Stock Market Based on the Augmented Fama and French Three-Factor Pricing Model
BRIGHI, PAOLA;D'ADDONA, STEFANO
2008
Abstract
The aim of this paper is to identify the pricing factor structure of Italian eq- uity returns. The Italian Stock Market is characterized mainly by small quoted firms. Small stocks have higher beta but beta differences are not enough to ex- plain returns differences. We investigate how these differences can be explained by other factors like size, value and momentum. A two step empirical analysis is provided where first we estimate an unrestricted multi-factor model to test if there is any evidence of mispecification. Secondly, we estimate the restricted model, with pricing errors equal to zero, through the Generalized Methods of Moments (GMM). In accordance with the main literature (see e.g. Fama and French 1992, 1993) we find that the size premium for stocks is confirmed for a domestic Italian investor. On the contrary the value premium is statistically weakly different from zero. Finally, augmenting the model with a momentum factor does not improve its performance.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
