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Competition, Markups and Predictable Returns

51 Pages Posted: 18 Jan 2015 Last revised: 9 Oct 2017

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: October 9, 2017

Abstract

When markups are high, new innovators can aggressively undercut incumbents to capture market share. Sensitivity to entry risk intensifies during times of high profit margins. We show that strategic interactions among firms in product markets provide a significant endogenous source of time-varying risks. Our general equilibrium production-based asset pricing model explains a sizable equity premium and predictable excess returns. Consistent with the data, the model predicts that higher markups are associated with higher expected returns.

Keywords: Production-based asset pricing, time-varying risk premia, stock return predictability, strategic interactions, recursive preferences

Suggested Citation

Corhay, Alexandre and Kung, Howard and Schmid, Lukas, Competition, Markups and Predictable Returns (October 9, 2017). 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 M5S1S4
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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