Sector-relative momentum in Swedish Small-Cap stocks

Abstract

This study examines the performance of momentum strategies in the Swedish small-cap equity universe over the period 2010-2026. Both traditional momentum strategies and residual momentum strategies were constructed using weekly price data and were evaluated over multiple lookback horizons, portfolio constructions and robustness specifications. The residual momentum strategies were obtained by removing sector exposure through a rolling regression framework, resulting in a sector-relative momentum signal. The results show that a sector-relative approach consistently delivers higher risk-adjusted returns than traditional momentum, with sharpe ratios reaching up to 0.8 compared to 0.57 for the corresponding traditional strategy. However, bootstrap tests indicate that differences in risk-adjusted performance between the residual and traditional strategies are not statistically significant at conventional levels. A transaction cost analysis shows that profitability for both approaches are highly sensitive to trading costs, with alpha largely disappearing under realistic cost assumptions. Overall, the findings suggest that momentum exists in the Swedish small-cap equity universe. While a sector-relative momentum approach seems to improve risk-adjusted performance and robustness, economic significance depends heavily on implementation costs.