based on introducing stochastic idiosyncratic cash flow risk into an equity valuation model of firms with growth options …. Within our model, a firm's systematic risk depends on the delta of its growth option. The growth option's delta is lower when … idiosyncratic volatility rises, driving down the firm's systematic risk and hence its expected return - firms with higher …

considerations imply a decomposition of squared market returns (coskewness risk). Our model accounts for 68% of the return variation …. Further, our findings highlight the importance of covariation risk, that is, the risk of simultaneous unfavorable shocks to … cash flows and discount rates, in understanding equity risk premia …