Competition, markups, and predictable returns

Corhay, A, Kung, H and Schmid, L (2020) Competition, markups, and predictable returns. Review of Financial Studies. ISSN 0893-9454 (In Press)


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 premiums and macroeconomic volatility associated with the secular increase trend industry concentration since the mid-1980s.

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Item Type: Article
Subject Areas: Finance
Subjects: A > Asset valuation
O > Oligopoly
Date Deposited: 08 Sep 2020 07:58
Last Modified: 30 Oct 2020 02:03

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