Residual Momentum or Residual Reversal Empirical Evidence of Taiwan Stock Market

Abstract

Based on the approach proposed by Blitz et al. (2013), we examined the performance of the firm portfolios constructed by the residual returns from the Fama-French three factor model (Fama and French, 1993) by sampling the listed firms in the Taiwan Stock Market from 1990 to 2017. We show that the performance of the conventional reversal and residual reversal strategies are not significant in the Taiwan stock market. In addition, the smallest-residual portfolio outperforms conventional return reversal portfolios either with equal weighting or capital weighting. To achieve robust results, we also differentiate the performance of the residual portfolios by different time periods and firm size. We find that the small-sized firms achieve higher returns and the monthly returns are significant in December, January and February for residual portfolios. We believe that the residual return can be a valuable factor for investors constructing their portfolios.