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Track T7-3: Market power, markups and asset prices
Time:
Tuesday, 21/May/2024:
10:30am - 11:15am
Session Chair: Erik Loualiche, University of Minnesota Discussant: Winston Dou, The Wharton School at University of Pennsylvania
Location:Room 601
Presentations
Markup Shocks and Asset Prices
Alexandre Corhay1, Jun Li2, Jincheng Tong1
1University of Toronto; 2University of Warwick
We explore the asset pricing implications of shocks that allow firms to extract more rents from consumers. These markup shocks directly impact the representative household's marginal utility and the firms' cash flow. Using firm-level data, we construct a measure of aggregate markup shocks and show that the price of markup risk is negative, that is, a positive markup shock is associated with high marginal utility states. Markup shocks generate differences in risk premia due to their heterogeneous impact on firms. Firms with larger exposures to markup shocks are less risky and have lower expected returns. We rationalize these findings in a general equilibrium model with markup shocks.