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

Fabio Panetta () and Roberto Violi
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Fabio Panetta: Bank of Italy, Economic Research Department

No 353, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

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.

Keywords: intertemporal consumer choice; asset prices; equity premium; Italian financial markets history (search for similar items in EconPapers)
JEL-codes: D91 G11 G12 N23 N24 (search for similar items in EconPapers)
Date: 1999-06
References: View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Is there an Equity Premium Puzzle in Italy? A Look at Asset Returns, Consumption and Financial Structure Data Over the Last Century (1999)
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