The acceleration effect and Gamma factor in asset pricing

Diego Ardila-Alvarez, Zalan Forro and Didier Sornette

Physica A: Statistical Mechanics and its Applications, 2021, vol. 569, issue C

Abstract: We report strong evidence that changes of momentum, i.e. “acceleration”, defined as the first difference of successive returns, is a novel effect complementing momentum of stock returns. Γ-strategies based on the “acceleration” effect are on average quite profitable and beat momentum-based strategies in two-third among a large panel of parameterizations. The “acceleration” effect, which we argue is associated with procyclical mechanisms, help elucidate many previous reports of transient non-sustainable accelerating (upward or downward) log-prices as well as many anomalies associated with the momentum factor. However, within standard asset pricing tests, Γ-pricing factors are poorer at explaining momentum-sorted portfolios than the reverse. This can be rationalized by the fact that the Γ effect represents the existence of transient positive feedbacks influencing the price formation process, which is only prevalent during special stock market regimes. Standard asset pricing tests are thus not the best suited to deal with such transient effects.

Keywords: Asset pricing; Momentum; Positive feedbacks; Acceleration; Investment strategies (search for similar items in EconPapers)
JEL-codes: G01 G11 G12 G17 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:569:y:2021:i:c:s0378437120307196

DOI: 10.1016/j.physa.2020.125367

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