Performance of value- and size-based strategies in the Italian stock market

This paper investigates the performance of size‐ and value‐based strategies in the Italian stock market in the period 2000–2018. Previous research argued the impossibility to define properly value‐sorted portfolios due to the inaccuracy of book‐to‐market ratios available for Italian listed stocks. Using more accurate data, we implement portfolios sorting based on value and growth stocks, to assess the relevance of the value factor in the Italian stock market. We find that the capital asset pricing model fails to explain the cross‐section of returns on the different strategies while the Fama and French three‐factor model provides a better fit. The results show that all three factors are significant in explaining Italian stock returns during the sample period. Unlike previous studies, which either found no value effect at all or no clear‐cut results when testing the book‐to‐market variable, we find that the value factor is statistically significant and the associated risk premium is of a considerable size.