Cash Flow News and Stock Price Dynamics

83 Pages Posted: 1 Mar 2018 Last revised: 1 Oct 2018

See all articles by Davide Pettenuzzo

Davide Pettenuzzo

Brandeis University - Department of Economics

Riccardo Sabbatucci

Stockholm School of Economics; Swedish House of Finance

Allan Timmermann

UCSD ; Centre for Economic Policy Research (CEPR)

Date Written: September 11, 2018

Abstract

We develop a new approach to modeling dynamics in cash flow data extracted from daily firm-level dividend announcements. We decompose the daily cash flow news series into a persistent component, jumps, and temporary shocks. Empirically, we find that the persistent cash flow growth component predicts future dividend growth and is significantly positively correlated with stock market returns. Cash flow dynamics have sizeable and long-lasting effects on the volatility and jump probability of stock returns through an uncertainty transmission channel. Finally, we find that news about the persistent cash flow growth component is correlated with a variety of cross-sectional risk factors.

Keywords: High-frequency cash flow news; predictability of dividend growth; jump risk; dynamics in stock returns; uncertainty transmission channel; Bayesian modeling

JEL Classification: G12,G17

Suggested Citation

Pettenuzzo, Davide and Sabbatucci, Riccardo and Timmermann, Allan, Cash Flow News and Stock Price Dynamics (September 11, 2018). Swedish House of Finance Research Paper No. 18-10. Available at SSRN: https://ssrn.com/abstract=3127042 or http://dx.doi.org/10.2139/ssrn.3127042

Davide Pettenuzzo

Brandeis University - Department of Economics ( email )

Waltham, MA 02454-9110
United States
781.736.2834 (Phone)
781.736.2269 (Fax)

Riccardo Sabbatucci (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

Allan Timmermann

UCSD ( email )

9500 Gilman Drive
La Jolla, CA 92093-0553
United States
858-534-0894 (Phone)

HOME PAGE: http://rady.ucsd.edu/people/faculty/timmermann/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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