Markup Shocks and Asset Prices

15:30-17:00, Friday, June 24, 2022

Tencent Meeting (Meeting ID: 179 831 405)

Dr. Jun LI is now an Assistant Professor of Finance at Shanghai Advanced Institute of Finance (SAIF), Shanghai Jiao Tong University. He earned his Ph.D. in Economics from Goethe University Frankfurt in 2018. His research interests include asset pricing, macroeconomics, financial frictions. He has his paper published in The Review of Financial Studies.

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.

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