Conventional momentum strategies exhibit substantial time-varying exposures to the Fama and French factors. We show that these exposures can be reduced by ranking stocks on residual stock returns instead of total returns. As a consequence, residual momentum earns risk-adjusted profits that are about twice as large as those associated with total return momentum; is more consistent over time; and less concentrated in the extremes of the cross-section of stocks. Our results are inconsistent with the notion that the momentum phenomenon can be attributed to a priced risk factor or market microstructure effects.
|Keywords||momentum, residual returns, stock-specific returns, time-varying risk|
|JEL||Portfolio Choice; Investment Decisions (jel G11), Asset Pricing (jel G12), Information and Market Efficiency; Event Studies (jel G14)|
|Persistent URL||dx.doi.org/10.1016/j.jempfin.2011.01.003, hdl.handle.net/1765/22252|
|Series||ERIM Top-Core Articles|
|Journal||Journal of Empirical Finance|
Blitz, D.C, Huij, J.J, & Martens, M.P.E. (2011). Residual Momentum. Journal of Empirical Finance, 18(3), 506–521. doi:10.1016/j.jempfin.2011.01.003