Simple Return: EPS Single Factor Pricing Model

Capital Asset Pricing Model (CAPM) has long been the limelight in the fields of assets pricing, yet it’s also been criticized due to the rejections of empirical tests. Discounted Dividend Model (DDM) and similar models also lack the power to investigate the relations between securities prices and intrinsic value of financial assets as they are unanimously rely on the predictions of the explanatory variables.In this article, we give up the traditional way of building asset pricing models by using indifferent curves and utility functions to reflect the process of investment decisions of investors. Our asset pricing model is based on the law of value. We prove that the process of stock exchange between different investors is much like the process of commodity exchange, and consequently, stock change should also follow a similar pattern. We also build a cross-section pricing model, and finally we design a long-short trading strategy to emulate the way of using the information of EPS of listed companies to generate profits.The data we use to conduct empiric tests are from Stand and Poor Xpressfeed, and the data are for1984-2009, including482NYSE-Listed companies. Results of empiric tests support our pricing models, and the returns of the long-short trading strategy are attractive.