The Acceleration Effect and Gamma Factor in Asset Pricing

Abstract

We report strong evidence that changes of momentum, i.e. "acceleration", defined as the first difference of successive returns, provide better performance and higher explanatory power than momentum. The corresponding Γ-factor explains the momentum-sorted portfolios entirely but not the reverse. Thus, momentum can be considered an imperfect proxy for acceleration, and its success can be attributed to its correlation to the predominant Γ-factor. Γ-strategies based on the "acceleration" effect are on average profitable and beat momentum-based strategies in two out of three cases, for a large panel of parameterizations. The "acceleration" effect and the Γ-factor profit from transient non-sustainable accelerating (upward or downward) log-prices associated with positive feedback mechanisms.

Keywords: Asset pricing, momentum, positive feedbacks, acceleration, investment strategies

JEL Classification: G01, G11, G12, G17