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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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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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Citations

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Cited by:
  1. Takáts, Előd, 2012. "Aging and house prices," Journal of Housing Economics, Elsevier, Elsevier, vol. 21(2), pages 131-141.
  2. : Arie E. Gozluklu, 2012. "Inflation, Stock Market and Long-Term Investors: Real Effects of Changing Demographics," Working Papers, Warwick Business School, Finance Group wpn12-06, Warwick Business School, Finance Group.
  3. : Carlo A. Favero & : Arie E. Gozluklu & : Haoxi Yang, 2013. "Demographics and The Behavior of Interest Rates," Working Papers, Warwick Business School, Finance Group wpn13-10, Warwick Business School, Finance Group.
  4. 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.
  5. 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.

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