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.
A reader asked: “Please help me understand the calculation of ‘acceleration.'”
Response:
In general (from physics), velocity is the change in position (first derivative of position), and acceleration is the change of velocity (second derivative of position). Similarly (again from physics), momentum is mass times velocity, and impulse is the derivative of momentum.
The author of the reviewed paper uses the term acceleration to mean the change in stock price momentum. The return of a stock or fund over some past interval of time (say six months) is a measure of its momentum. The change in this measure of momentum over some interval of time (say a month) is a measure of stock price acceleration.
For example, assume you measure momentum for a set of stocks or funds monthly as 6-month past return. This month, you find that a specific stock has advanced 30% over the prior 6 months, so its momentum is 30%. Next month, you roll your data by a month and find that the same stock has a revised momentum of 35%. Its momentum is accelerating. Conversely if you find the momentum of a stock decreasing from month to month, its momentum is decelerating.
The study finds that stocks with high and accelerating momentum outperform those with high momentum only.
Frequently Asked Questions
What is stock price acceleration in investing?
Stock price acceleration is the change in a stock's price momentum over time, a second derivative of price with respect to time. In the Gettleman and Marks study, momentum is the past six-month return and acceleration is how that measure changes from one month to the next. For example, a stock whose six-month momentum rises from 30% to 35% is accelerating, while one whose momentum falls is decelerating.
Does accelerating momentum predict higher stock returns?
Accelerating momentum predicted higher stock returns in the Gettleman and Marks study of monthly data from 1926-2003. Stocks with extremely high price acceleration outperformed those with extremely low acceleration by 6.15% when controlled only for momentum, and by 4.5% when controlled for other possible effects. Combining momentum and acceleration extended the outperformance of simple momentum strategies by about 3% over a six-month holding period.
How is stock price acceleration calculated and used in a trading strategy?
Stock price acceleration is calculated by measuring each stock's momentum monthly as its past six-month return, then taking the month-to-month change in that measure. The strategy focuses on stocks with both high six-month momentum and rapidly increasing momentum, and the study tested this on individual stocks using monthly data from 1926-2003. Trading on both momentum and acceleration produced a higher Sharpe ratio than simple momentum over a six-month holding period.
How is price acceleration different from regular momentum and from impulse in physics?
Price acceleration differs from regular momentum because momentum is the past return over an interval (here six months), while acceleration is the change in that momentum. Stocks with high and accelerating momentum outperformed stocks with high momentum only. By analogy with physics, where momentum's derivative is called impulse, the reviewer suggests "impulse" may be a more precise name for the effect than "acceleration."
Why might the outperformance from acceleration strategies be smaller than headline numbers suggest?
The headline outperformance of acceleration strategies shrinks when other possible effects are controlled for: the high-minus-low acceleration spread was 6.15% controlling only for momentum but 4.5% with additional controls. The results come from a single study of individual stocks over 1926-2003 and are consistent with a behavioral explanation that investors react gradually to firm-specific information. The article does not address trading costs or later-period performance, so real-world net returns may differ.