Antonio Carlo Francesco Della Bina

Too Small or Too Low? New Evidence on the 4-Factor Model

In 1992, Fama and French published a landmark paper in which they provided, by means of a cross-sectional analysis, strong evidence of explanatory power by size and book-to-market factors, compared with little or no ability by the market factor to explain differences in equity returns. After this, a large body of literature came out evidencing the beta model’s weakness in explaining asset returns. Empirical works have mostly used US data, and most of them reject the beta Capital Asset Pricing model (CAPM — see, for example, Grinold, 1993). In another paper, Fama and French (1993), using a time-series approach, found basically the same evidence. However, further evidence for their model (Lakonishok et al., 1994; Haugen, 1995), highlighted the role of investor overreaction (De Bondt and Thaler, 1985) in explaining the value anomaly. Based on the overreaction/under-reaction argument to information, Jegadeesh andTitman (1993) and Rouwenhorst (1998) document the existence of a momentum anomaly: over a medium time horizon, firms with high returns over the previous three months to one year continue to outperform firms with low past returns over the same period.

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 for stocks 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.