results in a state-dependent idiosyncratic risk premium that is higher when average idiosyncratic volatility is low, and vice …In Merton (1987), idiosyncratic risk is priced in equilibrium as a consequence of incomplete diversification. We modify … his model to allow the degree of diversification to vary with average idiosyncratic volatility. This simple recognition …

, such as the market excess return, size, book-to-market, momentum, liquidity, market volatility, and the variance risk … VIX slope risk is approximately 2.5% annually, statistically significant and cannot be explained by other common factors …