Beyond Price Momentum: Residual Momentum and Volatility Scaling

BASED ON BALTUSSEN, DOM, VAN VLIET & VIDOJEVIC (2026) · CFA INSTITUTE ENTERPRISING INVESTOR

Most practitioners think of momentum as a single number: buy last year’s winners, sell last year’s losers. This view is thirty years old. The academic literature has moved significantly further, and the practical implications for portfolio construction are substantial. Two concepts in particular — residual momentum and volatility scaling — deserve serious attention from any allocator running a systematic equity strategy.

This post unpacks both. Not the theory in isolation, but how they connect, why they work, and what it means for actual implementation in Indian markets.

The Problem with Plain Price Momentum

Standard 12–1 month price momentum works. Across geographies and time periods, buying recent winners and selling recent losers has generated positive returns. But it comes with a specific and well-documented failure mode: momentum crashes.

When markets reverse sharply after a prolonged trend — as they did in 2009 and briefly in 2020 — momentum portfolios experience drawdowns that are disproportionate to their volatility. Strategies that looked efficient suddenly exhibit negative skewness and excess kurtosis. Investors capitulate. The premium disappears for the people who needed it most.

“Price momentum conflates two distinct signals: the factor exposure of…