Theoretical Explanation of Return Predictability Based on Stock Price Formulation

摘要

To find out which factors determine stock return and to give rational explanation of return predictability, according to the principle of stock price formulation, the trend of stock price is obtained by use of option pricing method. The trend of stock price is put into reconstructing CAPM (capital asset pricing model) beta; it is concluded that the firm-specific biases and the scale biases potentially induce return predictability. In addition, through the relation between the biases structure and the intrinsic value, an appropriate theoretic explanation is supplied for three-factor pricing model proposed by Fama and French.