Five-factor residual momentum

: a comparative analysis

Abstract

Momentum strategies entail taking on time-varying exposures to the five factors of Famaand French. We show that by ranking stocks on the portion of their return not explained bysuch factors (residual return) improves momentum’s Sharpe ratio and results in less volatile performance. By comparing residual momentum with standard momentum we find that neither strategy can be explained by priced risk factors or by industry effects, but the residual momentum strategy subsumes traditional momentum. Not all of the Fama and French factors contribute equally to residual momentum and the simpler version of the strategy delivers the best performance. Our results also show that the profitability of standard momentum is not explained by the risk of factor timing.

Date of Award	9 May 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	José Gonçalo Maia Barbosa Valente Teixeira (Supervisor)