The Three-Factor Model: Evidence from the Italian Stock Market

Abstract

This paper describes the results obtained with the Fama-French model on the Italian Stock Exchange. The three-factor model was estimated on a sample of common stock during the period 1989-2004. The results found show that size has explanation power on the excess returns. In this paper, a comparison was made between one-factor model (CAPM) and the three-factor model. The size and beta show better explanation power if considered together. The results are similar to those of Fama and French (1998), and Cavaliere and Costa (1999). Unlike Cavaliere and Costa (1999), this work examines both variables size and book-to-market value. The results confirm a size effect.

Keywords: Three-Factor Model; Capital Asset Pricing Model; Italian Stock Market; Investment Decisions; Asset Pricing; Size Effect; Book-to-market.