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Rev Fin 2003; 16:417-457
© 2003 the Society for Financial Studies

An Analysis of Covariance Risk and Pricing Anomalies

Tobias J. Moskowitz
University of Chicago and NBER

Address correspondence to: Tobias J. Moskowitz, University of Chicago, Graduate School of Business, 1101 East 58th St., Chicago, IL 60637, or e-mail: tobias.moskowitz{at}gsb.uchicago.edu.

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.


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