Covariances vs. characteristics: what does explain the cross section of the German stock market returns? Christian Fieberg1 • Armin Varmaz2 • Thorsten Poddig1 Received: 27 May 2014 / Accepted: 28 January 2016 Ó The Author(s) 2016. This article is published with open access at Springerlink.com Abstract The characteristics book-to-market equity ratio, size and momentum are highly correlated with the average returns of common stocks. Fama and French (J Financ Econ 33(1):3–56, 1993), (J Finance 50(1):131–155, 1995) and (J Finance 51(1):55–84, 1996) argue (for size and the book-to-market equity ratio) that the relation between returns and characteristics arises because the characteristics are proxies for exposures to common risk factors. We examine the question whether the characteristics or the covariance structure of returns explain the cross-sectional dispersion in German stock market returns. Our results suggest that widely accepted factors SMB, HML or WML are not priced. Keywords Asset pricing Á Risk factor model Á Characteristics model Á German stock market returns Á Stock market anomalies
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