Residual momentum and the cross-section of stock returns: Chinese evidence.

• Residual momentum strategy yields significant profits in the Chinese equity market. • Residual momentum returns cannot be explained by four popular asset pricing models. • Residual momentum profits do not reverse in the long run. • The residual momentum factor is priced in the cross-section of stock returns. 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. [ABSTRACT FROM AUTHOR]