Idiosyncratic Cash Flows and Systematic Risk

@inproceedings{Babenko2013IdiosyncraticCF,
  title={Idiosyncratic Cash Flows and Systematic Risk},
  author={Ilona Babenko and W. P. Carey and Oliver Boguth and Rajnish Mehra and Kristian Miltersen and Dimitris Papanikolaou and Lasse Dannemann Pedersen},
  year={2013}
}
We show that unpriced cash flow shocks contain information about future priced risk. A positive idiosyncratic shock decreases the sensitivity of firm value to priced risk factors and simultaneously increases firm size and idiosyncratic risk. A simple model can therefore explain book-to-market and size anomalies, as well as the negative relation between idiosyncratic volatility and stock returns. Modeling idiosyncratic shocks can also produce a negative relation between growth options and risk… CONTINUE READING

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