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Is there an Equity Premium Puzzle in Italy? A Look at Asset Returns, Consumption and Financial Structure Data over the Last Century

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Author Info
Fabio Panetta () (Bank of Italy, Economic Research Department)
Roberto Violi (Bank of Italy, Economic Research Department)

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Abstract

This paper reconstructs the series of the real returns on Italian equities, bank and PO deposits and long-term government bonds from 1860 to today. In the long-run the return on shares was much higher than that on government securities and also that on bank and PO deposits. However, this summary assessment is considerably influenced by the exceptional falls in the real value of government securities and bank deposits caused by the hyperinflation that occurred in conjunction with the two world wars. Within the period, there were alternate phases, paralleling the economic cycle and the main institutional changes, in which the return on shares was higher than those on the other two instruments and vice versa. Overall, the Italian equity market provided long-run returns to investors comparable to those of other major countries, although a large fraction of the risk premium for the whole period can be accounted for by the performance following of the hyperinflation episodes of the wars. However, the risk-return trade-off, owing to much larger volatility, compared unfavourably with other markets. Moreover, the Italian equity market in the last 30 years (up to 1994), when equity prices barely kept up with inflation, looks very different. The econometric analysis suggests the presence of an equity premium puzzle in Italy during the estimation period, 1892-1993. In contrast, for government securities the observed returns were approximately in line with the theoretical values. The estimates show that both the returns on government securities and those on shares include an inflation risk premium. For government securities, this was estimated at around 0.8 percentage points. The inflation risk premium was smaller for shares.

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Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 353.

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Date of creation: Jun 1999
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Handle: RePEc:bdi:wptemi:td_353_99

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Related research
Keywords: intertemporal consumer choice; asset prices; equity premium; Italian financial markets history;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Monica Paiella & Andrea Tiseno, 2004. "Stock market optimism and participation cost: a mean-variance estimation," Econometric Society 2004 Latin American Meetings 239, Econometric Society. [Downloadable!]
    Other versions:
  2. Luigi Guiso & Tullio Jappelli, 2000. "Household Portfolios in Italy," CSEF Working Papers 43, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  3. Stefano Siviero & Daniele Terlizzese & Ignazio Visco, 1999. "Are model-based inflation forecasts used in monetary policymaking? A case study," Temi di discussione (Economic working papers) 357, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  4. Luigi Guiso & Tullio Jappelli, 2003. "Awareness and Stock Market Participation," CSEF Working Papers 110, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  5. Dario Focarelli & Fabio Panetta & Carmelo Salleo, 1999. "Why Do Banks Merge?," Temi di discussione (Economic working papers) 361, Bank of Italy, Economic Research Department. [Downloadable!]
  6. Massimo Caruso, 2006. "Stock market fluctuations and money demand in Italy, 1913-2003," Temi di discussione (Economic working papers) 576, Bank of Italy, Economic Research Department. [Downloadable!]
  7. Filippo Altissimo & Domenico J. Marchetti & Gian Paolo Oneto, 2000. "The Italian Business Cycle; Coincident and Leading Indicators and Some Stylized Facts," Temi di discussione (Economic working papers) 377, Bank of Italy, Economic Research Department. [Downloadable!]
  8. Leonardo Gambacorta, 1999. "What is the Optimal Institutional Arrangement for a Monetary Union?," Temi di discussione (Economic working papers) 356, Bank of Italy, Economic Research Department. [Downloadable!]
    Other versions:
  9. Ottavio Ricchi & Adolfo Di Carluccio & Cecilia Frale, 2004. "Do Privatizations Boost Household Shareholding? Evidence from Italy," Working Papers 2004.3, Fondazione Eni Enrico Mattei. [Downloadable!]
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