59 Pages Posted: 18 Jan 2015 Last revised: 16 Apr 2015
Date Written: April 15, 2015
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: 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