FRIC/Finance Seminar with Lukas Schmid, Fuqua School of Business, Duke University

FRIC Center for Financial Frictions and the Department of Finance are proud to announce the upcoming seminar with Lukas Schmid, Fuqua School of Business, Duke University.

Lukas Schmid will present:

Competition, Markups and Predictable Returns

Authors:
Alexandre Corhay, University of British Columbia and London Business School
Howard Kung, London Business School
Lukas Schmid, Fuqua School of Business, Duke University

Abstract:

Imperfect competition is a significant source of time-varying risk premia in asset markets. We embed a structural IO setup of imperfectly competitive industries into a general equilibrium production-based asset pricing model with recursive preferences. Movements in profit opportunities affect business formation and industry composition, and hence firms' competitive environment. We find that endogenous variation in industry concentration and competitive pressure amplifies and propagates macroeconomic risk asymmetrically. Endogenous countercyclical markups slow down demand and recoveries during downturns while procyclical profits render financial assets risky. The model predicts a sizeable and endogenously countercyclical equity premium which is forecastable with measures of markups and the intensity of new firm creation (entry), and a U-shaped term structure of equity returns. We find strong empirical support for these predictions in the data.