In this paper, we propose the hypothesis that cash flow and cash flow volatility predict returns. We categorize firms listed on the New York Stock Exchange into sectors, and apply tests for both in-sample and out-of-sample predictability. While we find strong evidence that cash flow volatility predicts returns for all sectors, the evidence obtained when using cash flow as a predictor is relatively weak. Estimated profits and utility gains also suggest that it is cash flow volatility that is more relevant as a source of information than cash flow.
Series
School Working Paper - Financial Econometrics Series ; 2015Pagination
1 - 23Publisher
Deakin University, School of Accoounting, Economics and FinancePlace of publication
Geelong, Vic.Language
engNotes
School working paper (Deakin University. School of Accounting, Economics and Finance) ; 2015/03
In this paper, we propose the hypothesis that cash flow and cash flow volatility predict returns. We categorize firms listed on the New York Stock Exchange into sectors, and apply tests for both in-sample and out-of-sample predictability. While we find strong evidence that cash flow volatility predicts returns for all sectors, the evidence obtained when using cash flow as a predictor is relatively weak. Estimated profits and utility gains also suggest that it is cash flow volatility that is more relevant as a source of information than cash flow.Publication classification
CN.1 Other journal articleCopyright notice
2015, The Authors
