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Cash-Hedged Stock Returns

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Abstract

Corporate cash piles vary across companies and over time. A firm's cash holding is an implicit position in a low-return asset that is correlated across firms. Cash generates variation in beta estimates. We show how investors can hedge out the cash on firms' balance sheets when making portfolio choices. We decompose stock betas into components that depend on the firm's cash holding, return on cash, and cash-hedged return. Common asset pricing premia — size, value, and momentum — have large implicit cash positions. Portfolios of cash-hedged premia often have higher Sharpe ratios because firms' cash returns are correlated.

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  • Chase P. Ross & Landon J. Ross, 2022. "Cash-Hedged Stock Returns," Finance and Economics Discussion Series 2022-055, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2022-55
    DOI: 10.17016/FEDS.2022.055
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    More about this item

    Keywords

    value; cross-section of expected returns; cash; size; risk factor; momentum;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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