Competition, Markups, and Predictable Returns

Alexandre Corhay, Howard Kung, Lukas Schmid and Stijn Van Nieuwerburgh

The Review of Financial Studies, 2020, vol. 33, issue 12, 5906-5939

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

JEL-codes: G12 L11 L13 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (9)

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