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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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  • Fabio Panetta

    () (Bank of Italy, Economic Research Department)

  • Roberto Violi

    (Bank of Italy, Economic Research Department)

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.

Suggested Citation

  • Fabio Panetta & Roberto Violi, 1999. "Is there an Equity Premium Puzzle in Italy? A Look at Asset Returns, Consumption and Financial Structure Data over the Last Century," Temi di discussione (Economic working papers) 353, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_353_99
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    Cited by:

    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.
    2. Grande, Giuseppe & Ventura, Luigi, 2002. "Labor income and risky assets under market incompleteness: Evidence from Italian data," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 597-620, March.
    3. 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 and International Relations Area.
    4. 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.
    5. Luigi Guiso & Tullio Jappelli, 2005. "Awareness and Stock Market Participation," Review of Finance, European Finance Association, vol. 9(4), pages 537-567.
    6. Maria Elena Bontempi & Roberto Golinelli, 2012. "The effect of neglecting the slope parameters’ heterogeneity on dynamic models of corporate capital structure," Quantitative Finance, Taylor & Francis Journals, vol. 12(11), pages 1733-1751, November.
    7. Siviero, S. & Terlizzese, D. & Visco, I., 1999. "Are Model-Based Inflation Forecasts Used in Monetary Policymaking? A Case Study," Papers 357, Banca Italia - Servizio di Studi.
    8. Ottavio Ricchi & Adolfo Di Carluccio & Cecilia Frale, 2004. "Do Privatizations Boost Household Shareholding? Evidence from Italy," Working Papers 2004.3, Fondazione Eni Enrico Mattei.
    9. Pelizzon, Loriana & Weber, Guglielmo, 2009. "Efficient portfolios when housing needs change over the life cycle," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2110-2121, November.

    More about this item

    Keywords

    intertemporal consumer choice; asset prices; equity premium; Italian financial markets history;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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