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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
  • 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

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7734.

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Date of creation: Mar 2010
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Handle: RePEc:cpr:ceprdp:7734

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Keywords: demographics; dynamic dividend growth model; long run returns predictability;

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References

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Cited by:
  1. 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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