Markup Shocks and Asset Prices

50 Pages Posted: 29 Mar 2022

See all articles by Alexandre Corhay

Alexandre Corhay

University of Toronto - Rotman School of Management

Jun E. Li

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Jincheng Tong

University of Toronto

Date Written: March 17, 2022

Abstract

We explore the asset pricing implications of shocks that allow firms to extract more rents from consumers. These markup shocks directly impact the representative household's marginal utility and the firms' cash flow. Using firm-level data, we construct a measure of aggregate markup shocks and show that the price of markup risk is negative, that is, a positive markup shock is associated with high marginal utility states. Markup shocks generate differences in risk premia due to their heterogeneous impact on firms. Firms with larger exposures to markup shocks are less risky and have lower expected returns. We rationalize these findings in a general equilibrium model with markup shocks.

Keywords: Production-based asset pricing, imperfect competition, time-varying markups, cross-section of stock returns, recursive preferences

JEL Classification: G12, G11, G10, E30

Suggested Citation

Corhay, Alexandre and Li, Jun and Tong, Jincheng, Markup Shocks and Asset Prices (March 17, 2022). Available at SSRN: https://ssrn.com/abstract=4060403 or http://dx.doi.org/10.2139/ssrn.4060403

Alexandre Corhay (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
4169780512 (Phone)

Jun Li

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Jincheng Tong

University of Toronto ( email )

Toronto, Ontario M5S1L1
Canada

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