Competition, Markups and Predictable Returns

47 Pages Posted: 18 Jan 2015 Last revised: 27 Aug 2019

See all articles by Alexandre Corhay

Alexandre Corhay

University of Toronto - Rotman School of Management

Howard Kung

London Business School; Centre for Economic Policy Research (CEPR)

Lukas Schmid

University of Southern California - Marshall School of Business

Date Written: October 9, 2017

Abstract

This paper jointly examines the link between competition and expected returns in the time series and in the cross section. To this end, we build a general equilibrium model where markups vary because of firm entry with oligopolistic competition. When concentration is high, markups are more sensitive to entry risk. We find that higher markups are associated with higher expected returns over time and across industries, in line with the data. The model can also quantitatively account for the persistent rise in aggregate risk premia and macroeconomic volatility associated with the secular increase trend industry concentration since the mid 1980s.

Keywords: Production-based asset pricing, imperfect competition, time-varying risk premia, stock return predictability, 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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Lukas Schmid (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

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