Competition, markups, and predictable returns

Subject

Finance

Publishing details

Social Sciences Research Network

Authors / Editors

Corhay A; Kung H; Schmid L

Biographies

Publication Year

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

Series

Social Sciences Research Network