Fundamental Extrapolation and Stock Returns

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

74 Pages Posted: 16 Oct 2020 Last revised: 18 Jan 2022

See all articles by Dashan Huang

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business

Huacheng Zhang

Nottingham University 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 propose an economic objective-driven pooling strategy to extrapolate multiple fundamentals simultaneously. This strategy outperforms naive extrapolation strategies that use a single fundamental variable and strategies that use past prices or analyst forecasts, and performs similarly as a machine learning-based pooling strategy. We propose a model to show that fundamental extrapolation has dual price effects: a cash flow effect that pushes stock price up relative to its fundamental value and a discount rate effect that depresses stock price via increasing the expected volatility. 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; 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

Nottingham University Business School ( email )

Business School South
Nottingham, Nottinghamshire NG81DD
United Kingdom

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)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
707
Abstract Views
2,889
rank
47,889
PlumX Metrics