Blog - Investing Notes

September 14, 2005 – Buying on Impulse (Change in Momentum)

In their September 2005 paper entitled "Acceleration Strategies", Eric Gettleman and Joseph Marks examine the change in six-month stock price momentum (a second derivative of price with respect to time, which the authors call "acceleration") for individual companies as a potential indicator of future performance. Does increasing (decreasing) stock price momentum indicate commensurate relative outperformance (underperformance)? Based on monthly data spanning 1926-2003, they conclude that:

• Stocks with extremely high price acceleration outperform stocks with extremely low price acceleration by 6.15% when controlled only for momentum and 4.5% when controlled for other possible effects.
• Trading on both stock price momentum and acceleration extends the outperformance of simple momentum strategies by about 3% over a six-month holding period, with a higher Sharpe ratio.
• These results are consistent with the behavioral view that investors react only gradually to firm-specific information.

In summary, focusing on stocks with both high six-month momentum and rapidly increasing six-month momentum offers significant excess returns.

A more precise analogy with physics suggests that "impulse" is more appropriate than "acceleration" as a name for this effect.

For related research, see Blog Synthesis: Momentum Investing/Trading.