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Competition, Markups, and Predictable Returns

Author

Listed:
  • Alexandre Corhay
  • Howard Kung
  • Lukas Schmid
  • Stijn Van Nieuwerburgh

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.

Suggested Citation

  • Alexandre Corhay & Howard Kung & Lukas Schmid & Stijn Van Nieuwerburgh, 2020. "Competition, Markups, and Predictable Returns," The Review of Financial Studies, Society for Financial Studies, vol. 33(12), pages 5906-5939.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:12:p:5906-5939.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa054
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    Citations

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    Cited by:

    1. Bandi, Federico M. & Bretscher, Lorenzo & Tamoni, Andrea, 2023. "Return predictability with endogenous growth," Journal of Financial Economics, Elsevier, vol. 150(3).
    2. Andrei, Daniel & Carlin, Bruce I., 2023. "Schumpeterian competition in a Lucas economy," Journal of Economic Theory, Elsevier, vol. 208(C).
    3. Fabian Hollstein & Marcel Prokopczuk & Christoph Matthias Würsig, 2024. "Market power and systematic risk," Financial Management, Financial Management Association International, vol. 53(2), pages 233-266, June.
    4. Alicia H. Dang & Roberto M. Samaniego, 2024. "Capital Depreciation And Industry Competition: Evidence And Theory," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 1081-1102, May.
    5. Alessandro Villa, 2022. "Credit Misallocation and Macro Dynamics with Oligopolistic Financial Intermediaries," Working Paper Series WP 2022-41, Federal Reserve Bank of Chicago.
    6. Dou, Winston Wei & Ji, Yan & Wu, Wei, 2021. "Competition, profitability, and discount rates," Journal of Financial Economics, Elsevier, vol. 140(2), pages 582-620.
    7. Lorenzo Bretscher, 2023. "From Local to Global: Offshoring and Asset Prices," Management Science, INFORMS, vol. 69(3), pages 1420-1448, March.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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