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Demographics and US Stock Market Fluctuations

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Author Info

  • Carlo A. Favero
  • Andrea Tamoni

Abstract

This article illustrates how the information component determining long-horizon US stock market returns can be related to a demographic variable, MY the ratio of middle-aged to young adults. In fact, MY can be seen as the major determinants of a slowly evolving time-varying mean of the dividend/price ratio. A forecasting model for stock market returns over a century of US annual data that uses as predictors the dividend/price ratio and MY overcomes all the statistical difficulties related to the high persistence of the dividend/price ratio and performs very well in forecasting long-horizon stock market returns. Moreover, the use of demographic variables as a predictor for long-run stock market returns delivers a steeply downward sloping term structure of stock market risk. (JEL codes: G17, C53, E44) Copyright The Author 2010. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/cesifo/ifq011
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Bibliographic Info

Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 57 (2011)
Issue (Month): 1 (March)
Pages: 25-43

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Handle: RePEc:oup:cesifo:v:57:y:2011:i:1:p:25-43

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