Asset price volatility, price markups, and macroeconomic fluctuations

A variant of the neoclassical growth model is considered to study the role of innovation, lags in technology adoption, total factor productivity TFP, and price markups as main determinants of asset price volatility. The model confers a prominent role to price markups as opposed to other macroeconomic sources of uncertainty. In the data, price markups are highly correlated with stock market values, whereas other financial measures of profitability exhibit much less volatility and are weakly correlated with stock market values.