Too Small or too Low? New Evidence on the 4-Factor Model
The aim of this paper is to study the pricing factor structure of Italian equity returns. Using twenty five years of data, we focus on the role of other risk factors besides the market beta, namely size, book to market, and momentum. A two step empirical analysis is provided where first we estimate an unrestricted multi-factor model to test if there is any evidence of misspecification. Then, we estimate the restricted model, i.e. with pricing errors equal to zero, through the Generalized Methods of Moments (GMM). We find that the market premium and the size premium for stocks are confirmed for a domestic Italian investor. On the contrary, according to our asset pricing tests, weak evidence is found for the value premium. Finally, we highlight, coherently with recent evidence on other countries but in contrast with previous evidence for the Italian stock market, that augmenting the model with a momentum factor does not improve its performance.
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