Stock returns and Cash Flows: a new asset pricing approach

Prior theories and models on assets pricing have highlighted the demand side of the security prices to evaluate the stocks’ performance. However, fundamental analysis and accounting measurement theory have been considered ad hoc for another approach related to the intrinsic value of the stocks; value investors are focused on the main concept “price is what you pay but value is what you get” – (Warren Buffet, 2018).
On this purpose, the dissertation is focused on a non-conventional profitability measure, at least in terms of assets pricing models, where dividends or profits are widely used. The attention is focused on a proxy measure of Operating Cash Flows: the “Ebitda after Capex”.
The relantionship returns – cash flows’ volatililty has been examined throught an empirical analysis conducted on the stocks of the S&P500 Index combining the main quantitative and statistical approach with a qualitative overview respect the macroeconomic background. Starting from a correlation rolling window approach, three different regressions techniques have been implemented; the simple Ordinary Least Squares regressions (OLS), the linear Quantile (LQR) regression and the Multiple regression model (MLR), all performed at different levels in terms of stocks (QoQ and YoY) and sectors (MoM, QoQ, YoY).
The cross-sectional and time-series results support the effects of cash flow’ volatility on the stocks’ performance and highlighted its sensitivity respect not only the different short-term and long-term horizons, but also in terms of sector’ exposure.
Keywords: Asset pricing, Volatility, Return, Quantile Regression, Stock pricing, Cash flow, Financial modelling, value investing, CAPM, Fama – French models.