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

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.