Posted: 4 Sep 2013
Date Written: October 5, 2009
In this paper we examine a momentum strategy based on residual stock returns. We find that residual momentum exhibits risk-adjusted profits that are about twice as large as those associated with total return momentum. Moreover, we find that the main arguments that have been put forward in the academic literature to rationalize momentum are unsuccessful in explaining residual momentum. Our results have important implications for the theoretical debate on market efficiency as well as the practical implementation of momentum trading strategies.
Keywords: momentum, time-varying risk, stock-specific returns, residual returns
JEL Classification: G11, G12, G14
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