Market-News Co-Moments and the Cross Section of Stock Returns

Abstract

We examine the asset-pricing implications of market-news co-moments by using shares listed on the U.S. stock market during 1928–2023. We find that firms with negative co-skewness (positive beta and co-kurtosis) of their market cash flows yield higher premia than otherwise comparable firms with positive co-skewness (negative beta and co-kurtosis) of their market cash flows. Our findings confirm that the market cash-flow beta, co-skewness and co-kurtosis premiums are priced in the U.S. market over and above what the market return, size, value, momentum, profitability and investment factors can explain. Our proposed cash-flow beta and co-skewness can predict realized cash-flow beta and co-skewness respectively. Further, our findings detect the potential sources of risk in stock returns that are reflected in the market cash-flow co-moments. Finally, we find low statistical and economic significance for our proposed discount-rate co-moments and the whammy shocks built by the market-news co-moments.