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A recent paper* by JP Morgan (JPM) Quant explores applying a residualization technique to ‘purify’ the momentum signal and reduce the related risks. This technique was already proposed by myself and Robeco researchers Joop Huij and Martin Martens in a research paper** published in 2011. The Robeco paper showed that this technique resulted in similar gross momentum returns, but at risk levels half those of generic momentum strategies.
The JPM Quant findings over the period December 1995-June 2015 were similar: they confirmed that the technique is indeed better than traditional beta neutralization. Furthermore, it helps to isolate and identify true stock-specific momentum above and beyond systematic momentum caused by overall market risk or other risk factors.
We are pleased with this external validation of our approach. All the Robeco Quantitative Equities strategies already incorporate this residual momentum technique.
* Residual Momentum reduces the severe drawdowns of conventional Price Momentum, JPM Quant, 2015
Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others. Head of Quant Equities Research David Blitz comments on notable external papers.