Cash-Hedged Stock Returns

53 Pages Posted: 7 Jul 2022

See all articles by Chase P. Ross

Chase P. Ross

Board of Governors of the Federal Reserve System

Landon Ross

U.S. Securities and Exchange Commission

Sharon Y. Ross

Office of Financial Research, US Department of the Treasury

Date Written: June 28, 2022

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.

Keywords: cross-section of expected returns, cash, risk factor, size, value, momentum

JEL Classification: G12

Suggested Citation

Ross, Chase P. and Ross, Landon and Ross, Sharon, Cash-Hedged Stock Returns (June 28, 2022). Available at SSRN: https://ssrn.com/abstract=4148710 or http://dx.doi.org/10.2139/ssrn.4148710

Chase P. Ross (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Landon Ross

U.S. Securities and Exchange Commission ( email )

Sharon Ross

Office of Financial Research, US Department of the Treasury ( email )

717 14th Street, NW
Washington, DC 20220
United States

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