The Determinants of Risk Premia on the Italian Stock Market: Empirical Evidence on Common Factors in Asset Pricing Models

We study the pricing factor structure of Italian equity returns using 25 years of data. A two‐step empirical analysis is provided where first we estimate an unrestricted multifactor model to test if there is any evidence of misspecification. Then, we estimate the restricted model through the Generalized Methods of Moments. We find that the market premium and the size premium are confirmed for a domestic Italian investor. On the contrary, weak evidence is found for the value premium. Finally, we highlight, that augmenting the model with a momentum factor may at least partially improve its performance. As a robustness check we control if the above results also hold for three shorter sub‐periods taking into account the macroeconomic and financial conditions that characterized the Italian economy. The results are generally confirmed in the case of the size and value factors while the momentum effect shows an irregular trend playing any role in the first sub‐period but becoming more important in the subsequent two.