Does it at all? If so, how?
It is understood that size and value play a role in determining returns and there are proposed explanation those these, but what about covariance?
Economics Stack Exchange is a question and answer site for those who study, teach, research and apply economics and econometrics. It only takes a minute to sign up.Sign up to join this community
It is not clear to what covariance this question refers to.
As in the CAPM model the covariance among assets is reduced to $\beta$, through the covariance with the market index.
Then, if CAPM is correct, we could explain the covariance relating the $\beta$s
In the context of multifactor models something similar occurs, since, in order to use those models, it is necessary to estimate $\beta$s, or sensitivities, related to each proposed factors.