Barra Risk Model Based Idiosyncratic Momentum for Chinese Equity Market

Abstract

We propose a different way of constructing an idiosyncratic momentum factor using the Barra Global Multi-factor Risk Model. Also, we examine the properties as well as the performance of this new factor by applying it to the China's stock market. Out analysis shows that the idiosyncratic momentum factor constructed here carries the resemblance of the conventional price momentum factor, but with much lower variance and exposure to the common market factors, such as value, size, and volatility. In the long-short portfolio test for both China's A-Share IMI and CSI 500 Indies, we observe the significant improvement of this factor's return over the conventional momentum. In particular, this factor delivers consistent high returns with a moderate IC increase but a significant IR improvement. The performance results strongly suggest that, compared with the traditional momentum factor, the idiosyncratic momentum factor is more reliable and possesses high predictive power for future stock returns. This factor is a good candidate to replace the traditional momentum factor when constructing an effective momentum strategy for investing in China's stock market.