Residual Momentum: Ranking Stocks by Factor-Adjusted Returns

Summary

The strategy seeks to reduce conventional momentum’s changing exposure to broad equity factors. It estimates each stock’s monthly residual returns from a regression on the Fama–French three factors, then ranks stocks by standardized residual performance over the prior year, skipping the most recent month. The described portfolio goes long the top decile and short the bottom decile, equally weighted and rebalanced monthly.

The document reports that the cited research found smaller dynamic factor exposures, greater consistency, and higher risk-adjusted returns than total-return momentum. It also describes a large-cap US stock universe and notes positive returns in recession months in the source paper, suggesting possible diversification value. These are summaries of cited studies rather than independently demonstrated results here; transaction costs, implementation details, and robustness in live trading are not established by the page. Related papers offer evidence across other markets and discuss momentum risk and factor-model portfolios.

Key ideas

• Residual momentum ranks stocks using returns unexplained by the Fama–French three factors.
• The strategy forms a monthly, equally weighted long-short portfolio from the highest and lowest residual-momentum deciles.
• The ranking uses the prior twelve months of residual returns and excludes the most recent month.
• The cited research associates residual momentum with lower changing factor exposures and improved risk-adjusted performance.
• The page summarizes academic findings and does not establish live performance or implementation costs.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.