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Demographic Trends, the Dividend-Price Ratio, and the Predictability of Long-Run Stock Market Returns

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  • Favero, Carlo A.
  • Gozluklu, Arie E.
  • Tamoni, Andrea

Abstract

This paper documents the existence of a slowly evolving trend in the dividend-price ratio, dpt, determined by a demographic variable, MY: the middle-aged to young ratio. Deviations of dpt from this long-run component explain transitory but persistent fluctuations in stock market returns. The relation between MY and dpt is a prediction of an overlapping generation model. The joint significance of MY and dpt in long-horizon forecasting regressions for market returns explain the mixed evidence on the ability of dpt to predict stock returns and provide a model-based interpretation of statistical corrections for breaks in the mean of this financial ratio.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 46 (2011)
Issue (Month): 05 (October)
Pages: 1493-1520

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Handle: RePEc:cup:jfinqa:v:46:y:2011:i:05:p:1493-1520_00

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Citations

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Cited by:
  1. Rengel, Malte & Herwartz, Helmut & Xu, Fang, 2013. "Persistence in the price-to-dividend ratio and its macroeconomic fundamentals," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79860, Verein für Socialpolitik / German Economic Association.
  2. : Arie E. Gozluklu, 2012. "Inflation, Stock Market and Long-Term Investors: Real Effects of Changing Demographics," Working Papers wpn12-06, Warwick Business School, Finance Group.
  3. Knell, Markus, 2013. "The Intergenerational Distribution of Demographic Fluctuations in Unfunded and Funded Pension Systems," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79830, Verein für Socialpolitik / German Economic Association.
  4. Takáts, Előd, 2012. "Aging and house prices," Journal of Housing Economics, Elsevier, vol. 21(2), pages 131-141.
  5. Carlo A. Favero & Arie E. Gozluklu & Haoxi Yang, 2011. "Demographics and The Behaviour of Interest Rates," Working Papers 388, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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