Today, the U.S. Office of Financial Research published a working paper, "Cash-Hedged Stock Returns," and an accompanying blog, regarding firms' cash holdings and the implications for asset prices and financial stability.
Cash holdings are important for financial stability because of their value in crises. Corporate cash piles vary across companies and over time. Firms' cash holdings typically earn low returns, and their cash returns are correlated across firms. Thus, the asset pricing results are important for investors managing a portfolio's risk and policymakers concerned about sources of vulnerability.
The working paper shows how investors can hedge cash on firms' balance sheets when making portfolio choices. Cash generates variation in beta estimates, and the working paper decomposes stock betas into components that depend on the firm's cash holding, return on cash, and cash-hedged return. Common asset pricing premia have large implicit cash positions, and portfolios of cash-hedged premia often have higher Sharpe ratios, used by investors to understand a return on investment, because of the correlation between firms' cash returns. The paper shows the value of a dollar increased in 2020, and firms hold cash because they are riskier.
The blog can be found here.
The working paper can be found here.
The OFR home page is: https://www.financialresearch.gov/.
Today, the U.S. Office of Financial Research published a working paper, "Cash-Hedged Stock Returns," and an accompanying blog, regarding firms' cash holdings and the implications for asset prices and financial stability.
Cash holdings are important for financial stability because of their value in crises. Corporate cash piles vary across companies and over time. Firms' cash holdings typically earn low returns, and their cash returns are correlated across firms. Thus, the asset pricing results are important for investors managing a portfolio's risk and policymakers concerned about sources of vulnerability.
The working paper shows how investors can hedge cash on firms' balance sheets when making portfolio choices. Cash generates variation in beta estimates, and the working paper decomposes stock betas into components that depend on the firm's cash holding, return on cash, and cash-hedged return. Common asset pricing premia have large implicit cash positions, and portfolios of cash-hedged premia often have higher Sharpe ratios, used by investors to understand a return on investment, because of the correlation between firms' cash returns. The paper shows the value of a dollar increased in 2020, and firms hold cash because they are riskier.
The blog can be found here.
The working paper can be found here.
The OFR home page is: https://www.financialresearch.gov/.
