Abstract
In this paper, I find that sorting stocks into portfolios based on their residual, as opposed to raw past returns, generates significant profits in the Chinese equity market and cannot be subsumed by the well-established factor models. Moreover, the residual momentum profits do not reverse in the long run (up to three years), supporting the investor underreaction hypothesis. Further analysis reveals that residual momentum is priced in the cross-section of stock returns whereas the Carhart (1997) momentum factor is found to be redundant for describing average stock returns.
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