Minimal dynamic equilibria

Minimal dynamic equilibria

27/08/2025

12:00

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12:30

We introduce an out-of-sample neural-network-based measure of firm-level operating leverage, which outperforms existing ones in capturing the elasticity of operating profits to gross profits. Strikingly, our analysis uncovers a non-monotonic—and potentially negative—relationship between operating leverage and the risk premium. This challenges conventional wisdom and contradicts explanations that link operating leverage to the value premium. A production-based asset pricing model incorporating both variable and fixed costs provides a possible rationale for these empirical findings. Furthermore, our analysis offers a fresh perspective on the idiosyncratic volatility premium by emphasizing the interplay between the operating hedge effect induced by variable costs and the operating leverage effect induced by fixed costs.

We introduce an out-of-sample neural-network-based measure of firm-level operating leverage, which outperforms existing ones in capturing the elasticity of operating profits to gross profits. Strikingly, our analysis uncovers a non-monotonic—and potentially negative—relationship between operating leverage and the risk premium. This challenges conventional wisdom and contradicts explanations that link operating leverage to the value premium. A production-based asset pricing model incorporating both variable and fixed costs provides a possible rationale for these empirical findings. Furthermore, our analysis offers a fresh perspective on the idiosyncratic volatility premium by emphasizing the interplay between the operating hedge effect induced by variable costs and the operating leverage effect induced by fixed costs.

Antonio Gargano
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Emilia Bunea
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Allan Mendelowitz
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Allan Mendelowitz

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Allan Mendelowitz
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Albert Menkveld
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Albert Menkveld

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Albert Menkveld
Keynote: "What we can learn today about the markets of tomorrow: Crypto, crashes and credible research"
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Albert Menkveld

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