Fundamental Extrapolation and Stock Returns

European Finance Association 2020 Annual Meeting (virtual), American Finance Association 2022 Annual Meeting (Boston, Scheduled)

66 Pages Posted: 16 Oct 2020 Last revised: 18 Jun 2021

See all articles by Dashan Huang

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business

Huacheng Zhang

Southwestern University of Finance and Economics - Institute of Financial Studies

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

Yingzi Zhu

Tsinghua University - School of Economics & Management

Date Written: August 21, 2020

Abstract

We propose a pooling fundamental extrapolation strategy by using all fundamentals simultaneously. This strategy outperforms naive extrapolation strategies that use a single fundamental variable and strategies that use past prices or analyst forecasts. Since the strategy's performance is unexplained by existing theories, we provide a model to show that it has dual price effects: a cash flow effect that pushes stock price up relative to its fundamental value and a discount rate effect that increases the representative investor's expected volatility and depresses stock price. Our empirical results suggest that the discount rate effect dominates the cash flow effect.

Keywords: Fundamental Extrapolation; Return Extrapolation; Volatility; Expectation

JEL Classification: G41, G14

Suggested Citation

Huang, Dashan and Zhang, Huacheng and Zhou, Guofu and Zhu, Yingzi, Fundamental Extrapolation and Stock Returns (August 21, 2020). European Finance Association 2020 Annual Meeting (virtual), American Finance Association 2022 Annual Meeting (Boston, Scheduled), Available at SSRN: https://ssrn.com/abstract=3678363 or http://dx.doi.org/10.2139/ssrn.3678363

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore

HOME PAGE: http://dashanhuang.weebly.com/

Huacheng Zhang

Southwestern University of Finance and Economics - Institute of Financial Studies ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Guofu Zhou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

Yingzi Zhu

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62786041 (Phone)

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