Fundamental Extrapolation and Stock Returns

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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; China Academy of Financial Research (CAFR)

Yingzi Zhu

Tsinghua University - School of Economics & Management

Date Written: July 1, 2020

Abstract

We explore the effects of fundamental extrapolation on stock returns. Empirically, we propose a novel approach to extrapolate firms' fundamental information and find that a strategy based on fundamental extrapolation earns a 0.80% average return per month. Theoretically, we show that fundamental extrapolation has dual effects on stock price: cash flow effect and discount rate effect. The former pushes stock price up relative to its fundamental value whereas the latter increases the representative investor's expected volatility and depresses today's stock price. Our empirical results suggest that the discount rate effect dominates the cash flow effect overall.

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 (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=

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/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

Yingzi Zhu

Tsinghua University - School of Economics & Management ( email )

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

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