Competition, Markups and Predictable Returns

59 Pages Posted: 18 Jan 2015 Last revised: 16 Apr 2015

Alexandre Corhay

University of Toronto - Rotman School of Management

Howard Kung

London Business School

Lukas Schmid

Duke University - The Fuqua School of Business

Date Written: April 15, 2015

Abstract

Imperfect competition is an important channel for time-varying risk premia in asset markets. We build a general equilibrium model with monopolistic competition and endogenous firm entry and exit. Endogenous variation in industry concentration generates countercyclical markups, which amplifies macroeconomic risk. The nonlinear relation between the measure of firms and markups endogenously generates countercyclical macroeconomic volatility. With recursive preferences, the volatility dynamics leads to countercyclical risk premia forecastable with measures of competition. Also, the model produces a U-shaped term structure of equity returns.

Keywords: Imperfect competition, markups, entry and exit, productivity, business cycle propagation, asset pricing, predictability, recursive preferences

Suggested Citation

Corhay, Alexandre and Kung, Howard and Schmid, Lukas, Competition, Markups and Predictable Returns (April 15, 2015). Available at SSRN: https://ssrn.com/abstract=2550981 or http://dx.doi.org/10.2139/ssrn.2550981

Alexandre Corhay

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
4169780512 (Phone)

Howard Kung

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Lukas Schmid (Contact Author)

Duke University - The Fuqua School of Business ( email )

Durham, NC 27708-0120
United States

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