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An Analysis of Covariance Risk and Pricing Anomalies

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  • Tobias J. Moskowitz
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    Abstract

    This article examines the link between several well-known asset pricing "anomalies" and the covariance structure of returns. I find size, book-to-market, and momentum strategies exhibit a strong, weak, and negligible relation to covariance risk, respectively. A size factor helps predict future volatility and covariation, improving the efficiency of investment strategies. Moreover, its premium rises following increases in both its volatility and covariation with other assets. These effects are amplified in recessions. No such relations exist for book-to-market or momentum. These findings may shed light on explanations for these premia and present a challenging set of facts for future theory. Copyright 2003, Oxford University Press.

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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 16 (2003)
    Issue (Month): 2 ()
    Pages: 417-457

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    Handle: RePEc:oup:rfinst:v:16:y:2003:i:2:p:417-457

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    Cited by:
    1. Avramov, Doron & Wermers, Russ, 2005. "Investing in mutual funds when returns are predictable," CFR Working Papers 05-13, University of Cologne, Centre for Financial Research (CFR).
    2. Gregory H. Bauer & Keith Vorkink, 2007. "Multivariate Realized Stock Market Volatility," Working Papers, Bank of Canada 07-20, Bank of Canada.
    3. Andreou, Elena & Matsi, Maria & Savvides, Andreas, 2013. "Stock and foreign exchange market linkages in emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 27(C), pages 248-268.
    4. Laura X.L. Liu & Jerold B. Warner & Lu Zhang, 2005. "Momentum Profits and Macroeconomic Risk," NBER Working Papers 11480, National Bureau of Economic Research, Inc.
    5. Hou, Kewei & Hirshleifer, David & Teoh, Siew Hong, 2007. "The Accrual Anomaly: Risk or Mispricing?," MPRA Paper 5173, University Library of Munich, Germany.
    6. Theodoros Diasakos, 2008. "Comparative Statics of Asset Prices," Carlo Alberto Notebooks, Collegio Carlo Alberto 72, Collegio Carlo Alberto, revised 2011.
    7. Brockman, Paul & Liebenberg, Ivonne & Schutte, Maria, 2010. "Comovement, information production, and the business cycle," Journal of Financial Economics, Elsevier, Elsevier, vol. 97(1), pages 107-129, July.
    8. Avramov, Doron & Wermers, Russ, 2006. "Investing in mutual funds when returns are predictable," Journal of Financial Economics, Elsevier, Elsevier, vol. 81(2), pages 339-377, August.
    9. Bali, Turan G., 2008. "The intertemporal relation between expected returns and risk," Journal of Financial Economics, Elsevier, Elsevier, vol. 87(1), pages 101-131, January.
    10. Bauer, Gregory H. & Vorkink, Keith, 2011. "Forecasting multivariate realized stock market volatility," Journal of Econometrics, Elsevier, Elsevier, vol. 160(1), pages 93-101, January.
    11. Cevdet Aydemir, A., 2008. "Risk sharing and counter-cyclical variation in market correlations," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 32(10), pages 3084-3112, October.
    12. Redouane Elkamhia & Denitsa Stefanova, 2011. "Dynamic Correlation or Tail Dependence Hedging for Portfolio Selection," Tinbergen Institute Discussion Papers 11-028/2/DSF10, Tinbergen Institute.
    13. Gutierrez, Roberto Jr. & Prinsky, Christo A., 2007. "Momentum, reversal, and the trading behaviors of institutions," Journal of Financial Markets, Elsevier, Elsevier, vol. 10(1), pages 48-75, February.
    14. Gang-Zhi Fan & Zsuzsa Huszár & Weina Zhang, 2013. "The Relationships between Real Estate Price and Expected Financial Asset Risk and Return: Theory and Empirical Evidence," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 46(4), pages 568-595, May.
    15. Szu-Yin Hung & John Glascock, 2010. "Volatilities and Momentum Returns in Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 41(2), pages 126-149, August.

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