Time Series Residual Momentum

The momentum strategy as described in the seminal work of Jegadeesh and Titman (1993) leads to stream of studies on theoretical work of momentum effect and empirical analysis in different financial assets and markets of several countries. However, the characteristics displayed by the momentum strategy have often being argued that was associated with risk exposures to pricing factors and time-varying risk. Especially, the investment portfolio's performance endanger profound drawdown risk when the market rebounds after financial crisis. In this study, I proposed the time series residual momentum strategy to mitigate the magnitude of losses. If the stock positively (negatively) deviates from predicted intrinsic values during a short-term period, it is denoted as over-valuation (under-valuation). Through investigating the U.S. stock market, the empirical results show the proposed strategy can not only achieve significant improvement for the conventional momentum strategy, but also can substantially reduce the drastic losses from financial crises.