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Covariances vs. characteristics: what does explain the cross section of the German stock market returns?

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  • Christian Fieberg

    (University of Bremen)

  • Armin Varmaz

    (University of Applied Sciences)

  • Thorsten Poddig

    (University of Bremen)

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.

Suggested Citation

  • Christian Fieberg & Armin Varmaz & Thorsten Poddig, 2016. "Covariances vs. characteristics: what does explain the cross section of the German stock market returns?," Business Research, Springer;German Academic Association for Business Research, vol. 9(1), pages 27-50, April.
    • Handle: RePEc:spr:busres:v:9:y:2016:i:1:d:10.1007_s40685-016-0029-4
    DOI: 10.1007/s40685-016-0029-4
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    References listed on IDEAS

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