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The Acceleration Effect and Gamma Factor in Asset Pricing

Last Updated on 10 February, 2024 by Rejaul Karim

The Acceleration Effect and Gamma Factor in Asset Pricing” is a research paper by Diego Ardila, Zalàn Forrò, and Didier Sornette that explores the concept of acceleration, defined as the first difference of successive returns, and its role in outperforming traditional momentum-based strategies.

The authors present strong evidence highlighting the superiority of this approach, with the Γ-factor exhibiting better performance and higher explanatory power. Interestingly, while the Γ-factor can explain momentum-sorted portfolios, the reverse is not true, suggesting that momentum might be an imperfect proxy for acceleration.

By analyzing a large panel of parameterizations, the study reveals that Γ-strategies based on acceleration beat momentum-based approaches in two-thirds of cases, profiting from transient non-sustainable log-price movements associated with positive feedback mechanisms.

This research opens new possibilities for asset pricing, investment strategies, and the role of acceleration in capturing non-linear dynamics in financial markets.

Abstract Of Paper

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.

Original paper – Download PDF

Here you can download the PDF and original paper of The Acceleration Effect and Gamma Factor in Asset Pricing.

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Author

Diego Ardila
ETH Zürich

Zalàn Forrò
Independent

Didier Sornette
Risks-X, Southern University of Science and Technology (SUSTech); Swiss Finance Institute; ETH Zürich – Department of Management, Technology, and Economics (D-MTEC); Tokyo Institute of Technology

Conclusion

In conclusion, the research paper “The Acceleration Effect and Gamma Factor in Asset Pricing” by Diego Ardila, Zalàn Forrò, and Didier Sornette presents compelling evidence for the superior performance and explanatory power of acceleration, defined as the first difference of successive returns, compared to traditional momentum.

The authors demonstrate the Γ-factor’s ability to explain momentum-sorted portfolios fully, emphasizing that momentum serves as an imperfect proxy for acceleration due to its correlation with the predominant Γ-factor. Γ-strategies capitalizing on the acceleration effect outperform momentum-based strategies in a majority of cases, utilizing a large panel of parameterizations.

The acceleration effect and Γ-factor benefit from transient non-sustainable log-price movements driven by positive feedback mechanisms. This innovative approach to asset pricing and investment strategies offers a fresh perspective on the role of acceleration, redefining the potential for capturing non-linear market dynamics.

Related Reading:

Evolution of Historical Prices in Momentum Investing

Investor Attention, Visual Price Pattern, and Momentum Investing

FAQ

What is the main focus of the research paper “The Acceleration Effect and Gamma Factor in Asset Pricing” by Diego Ardila, Zalàn Forrò, and Didier Sornette?

The research paper focuses on the concept of acceleration, defined as the first difference of successive returns, and its role in outperforming traditional momentum-based strategies in asset pricing. The authors explore the Γ-factor, derived from acceleration, and present evidence suggesting its superior performance and higher explanatory power compared to momentum.

How does the study characterize the relationship between acceleration and momentum, and what does it reveal about their respective roles in asset pricing?

The study characterizes momentum as an imperfect proxy for acceleration, and the authors show that the Γ-factor, derived from acceleration, explains momentum-sorted portfolios entirely. The reverse, however, is not true. This suggests that momentum’s success can be attributed to its correlation with the predominant Γ-factor, emphasizing the importance of considering acceleration in asset pricing.

What are the key findings regarding the performance of Γ-strategies based on acceleration compared to momentum-based approaches?

The research reveals that Γ-strategies based on acceleration outperform momentum-based strategies in two out of three cases, considering a large panel of parameterizations. The study demonstrates the profitability of Γ-strategies, showcasing the potential of acceleration as a valuable factor in constructing investment strategies.

You can find many more Research Papers here

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