The Pricing of Italian Equity Returns

Abstract

In this paper, we investigate the relationship between common risk factors and average returns for Italian stocks. Our research has identi®ed the Italian stock market's economic variables by using the results from factor analyses and time series regressions.We study several multi-factor models combining the relevant macroeconomic variables with the mimicking equity portfolios SMB (small minus big) and HML (high minus low) proposed by Fama and French (1993). The key question we want to ask ourselves, is whether the in¯uential role of the size and book-to-market equity factors in explaining average stock returns can stand up well when competing with some macroeconomic factors. In other words, do stock returns carry some risk premium that is independent of either the market return or the economic forces that underlie the common variation in returns?Our empirical work estimates risk premiums using both traditional two-pass procedures and one-pass (full information) methodologies. We show that only the market index and variables linked to interest rate shifts are consistently priced in the Italian stock returns. The role of other factors, and in particular both the size and the price-to book ratio, are crucially dependent on the estimation procedure.(J.E.L.: G11, G12).

Financial leverage and stock returns: evidence from an emerging economy

“…These results are comparable with other findings on emerging and developed economies. Aleati, Gottardo, and Murgia (2000) reported presence of weak market risk premium for Italian stocks while recognising significant loading on size and value factors. Connor and Sanjay (2001) also pointed out that for Indian firms, beta is a weak proxy of risk.…”

The Stability of the Relation Between the Stock Market and Macroeconomic Forces

“…Because these developments may well have induced instability in the relation between securities' returns and macroeconomic factors, including the post-1994 period would have greatly reduced the generality of our results. Second, our sample period is similar to the time span examined in previous analyses which find that the macroeconomic variables are factors priced in the Italian stock market; see Roma and Schlitzer (1996) and Aleati et al (2000).…”

On the source of contrarian and momentum strategies in the Italian equity market

“…24 To facilitate the following explanation and to allow comparisons with previous studies, we concentrate only on portfolios with a 12-month formation period. 24 While results on size and book-to-market factors seem to be less definitely conclusive in explaining Italian stock returns than their U.S. counterparts, the market risk factor is generally shown to play a more central role in Italy than in the U.S. context (Aleati, Gottardo, & Murgia, 2000;Barontini, 1996;Caprio, 1989). At the same time, as this topic is still widely debated in the literature- Heston, Rouwenhorst, and Wessels (1999), for example, find that beta and size parameters are not significant in Italy-we decide to consider both a single-and a multifactor risk framework to overcome any criticisms concerning this choice.…”