Working Paper: CEPR ID: DP14117
Authors: Davide Pettenuzzo; Riccardo Sabbatucci; Allan Timmermann
Abstract: We develop a new approach to modeling dynamics in cash flow data extracted from daily firm-level dividend announcements. We decompose daily cash flow news into a persistent component, jumps, and temporary shocks. Empirically, we find that the persistent cash flow component is a highly significant predictor of future growth in dividends and consumption. Using a log-linearized present value model, we show that news about the persistent dividend growth component helps predict stock returns consistent with asset-pricing constraints implied by this model. News about the daily dividend growth process also helps explain concurrent return volatility and the probability of jumps in stock returns.
Keywords: high-frequency cash flow news; predictability of dividend growth; present value model; dynamics and predictability of stock returns
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Persistent Cash Flow Component (G19) | Future Dividend Growth (G35) |
| Persistent Cash Flow Component (G19) | Stock Returns (G12) |
| Cash Flow News (G19) | Concurrent Return Volatility (G17) |
| Higher Uncertainty about Dividend Growth (D89) | Increased Stock Market Volatility (G17) |
| Higher Uncertainty about Dividend Growth (D89) | Higher Likelihood of Jumps in Stock Prices (G17) |