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

36 Pages Posted: 16 Dec 2010

See all articles by Paola Brighi

Paola Brighi

University of Bologna - Department of Management

Stefano d'Addona

University of Roma Tre

Antonio Carlo Francesco Della Bina

University of Bologna - Department of Management

Date Written: October 15, 2010

Abstract

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.

Keywords: The Fama-French Factors, Size Effect, Value Premium, GMM, Momentum Anomaly

JEL Classification: G10, G12

Suggested Citation

Brighi, Paola and d'Addona, Stefano and Della Bina, Antonio Carlo Francesco, Too Small or Too Low? New Evidence on the 4-Factor Model (October 15, 2010). Available at SSRN: https://ssrn.com/abstract=1726022 or http://dx.doi.org/10.2139/ssrn.1726022

Paola Brighi (Contact Author)

University of Bologna - Department of Management ( email )

Via Capo di Lucca 34
Bologna 40126
Italy

Stefano D'Addona

University of Roma Tre ( email )

Via Chiabrera, 199
Rome, 00145
Italy

Antonio Carlo Francesco Della Bina

University of Bologna - Department of Management ( email )

Piazza Scaravilli 1
Bologna, Bologna 40126
Italy

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