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The acceleration effect and Gamma factor in asset pricing

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  • Ardila-Alvarez, Diego
  • Forro, Zalan
  • Sornette, Didier

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.

Suggested Citation

  • Ardila-Alvarez, Diego & Forro, Zalan & Sornette, Didier, 2021. "The acceleration effect and Gamma factor in asset pricing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 569(C).
    • Handle: RePEc:eee:phsmap:v:569:y:2021:i:c:s0378437120307196
    DOI: 10.1016/j.physa.2020.125367
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    More about this item

    Keywords

    Asset pricing; Momentum; Positive feedbacks; Acceleration; Investment strategies;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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