Testing the capital asset pricing model in the Italian market

In this paper we provide an empirical investigation of the classic Capital Asset Pricing Model (CAPM) on all firms listed in the Italian stock exchange at the monthly frequency. We intend to show that the CAPM, despite the heavy critical comments, still holds in the Italian market when returns are measured at the monthly frequency. Most importantly, our evidence indicates that the market portfolio fully explains the cross section of stock returns and there is no need to appeal for additional determinants. Our results have very important implications for long term investors who can forecast the expected excess stock returns by simply determining the beta of the stock and the expected excess market return.