| Abstract: | This article examines the link between several well-known assetpricing "anomalies" and the covariance structure of returns.I find size, book-to-market, and momentum strategies exhibita strong, weak, and negligible relation to covariance risk,respectively. A size factor helps predict future volatilityand covariation, improving the efficiency of investment strategies.Moreover, its premium rises following increases in both itsvolatility and covariation with other assets. These effectsare amplified in recessions. No such relations exist for book-to-marketor momentum. These findings may shed light on explanations forthese premia and present a challenging set of facts for futuretheory. |
