Fundamental Extrapolation and Stock Returns

European Finance Association 2020 Annual Meeting; American Finance Association 2022 Annual Meeting

67 Pages Posted: 16 Oct 2020 Last revised: 4 Oct 2023

See all articles by Dashan Huang

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business

Huacheng Zhang

University of Edinburgh Business School

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 study fundamental extrapolation based on multiple fundamental variables. Using ten leading such variables, we find that they have much stronger predictive power on stock returns than previously thought, via three pooling strategies that integrate information simultaneously. They outperform naive extrapolations using a single fundamental variable and strategies using past prices or analyst forecasts. We propose a simple equilibrium model to explain the predictability, which allows for both a cash flow effect, which pushes stock price up relative to the fundamental value, and a discount rate effect, which depresses stock price with an increased exposure on the consumption volatility.

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; American Finance Association 2022 Annual Meeting, 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

University of Edinburgh Business School ( email )

EH8 9JS (Fax)

HOME PAGE: http://https://www.business-school.ed.ac.uk/

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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