Capital Asset Pricing Model and Arbitrage Pricing Theory
in the Italian Stock Market: an Empirical Study
ARDUINO CAGNETTI?
ABSTRACT
The Italian stock market (ISM) has interesting characteristics. Over 40% of the shares, in
a sample of 30 shares, together with the Mibtel market index, are normally distributed.
This suggests that the returns distribution of the ISM as a whole may be normal, in
contrast to the findings of Mandelbrot (1963) and Fama (1965). Empirical tests in this
study suggest that the relationships between ß and return in the ISM over the period
January 1990 ? June 2001 is weak, and the Capital Asset Pricing Model (CAPM) has poor
overall explanatory power. The Arbitrage Pricing Theory (APT), which allows multiple
sources of systematic risks to be taken into account, performs better than the CAPM, in all
the tests considered. Shares and portfolios in the ISM seem to be significantly influenced
by a number of systematic forces and their behaviour can be explained only through the
combined explanatory power of several factors or macroeconomic variables. Factor
analysis replaces the arbitrary and controversial search for factors of the APT by “trial and
error” with a real systematic and scientific approach.
The behaviour of share prices, and the relationship between risk and return in
financial markets, have long been of interest to researchers. In 1905, a young
scientist named Albert Einstein, seeking to demonstrate the existence of atoms,
developed an elegant theory based on Brownian motion. Einstein explained Brownian
motion the same year he proposed the theory of relativity. At that time his results
were considered completely revolutionary. However, the theory of Bro ...