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The Equity Premium and the Baby Boom

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  • Robin Brooks

Abstract

This paper explores the quantitative impact of the Baby Boom on stock and bond returns. It constructs a neoclassical growth model with overlapping generations, in which agents make a portfolio decision over risky capital and safe bonds in zero net supply. The model has exogenous technology and population shocks that are calibrated to match long run data for the US. With agents allowed to borrow freely by shorting bonds, the model fails to match the historical equity premium by a large margin and generates only small asset market effects over a simulated Baby Boom. When agents are constrained in their ability to borrow, the model comes close to matching the historical equity premium and suggests that there will be a sharp rise in the equity premium when the Baby Boomers retire, driven by a large decline in bond returns as Baby Boomers seek to hold the riskless asset in retirement

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File URL: http://repec.org/esNAWM04/up.25430.1048539824.pdf
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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 155.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nawm04:155

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Keywords: Equity premium; population aging; portfolio choice;

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Cited by:
  1. De Santis, Roberto A. & Lührmann, Melanie, 2009. "On the determinants of net international portfolio flows: A global perspective," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 880-901, September.
  2. Börsch-Supan, Axel & Ludwig, Alexander & Sommer, Mathias, 2005. "Aging and Asset Prices," Sonderforschungsbereich 504 Publications 07-29, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  3. Ang, Andrew & Maddaloni, Angela, 2003. "Do demographic changes affect risk premiums? Evidence from international data," Working Paper Series 0208, European Central Bank.
  4. Elod Takats, 2010. "Ageing and asset prices," BIS Working Papers 318, Bank for International Settlements.
  5. Wolfgang Kuhle, 2008. "Demography and Equity Premium," MEA discussion paper series 08157, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  6. De Santis, Roberto A. & Lührmann, Melanie, 2006. "On the determinants of external imbalances and net international portfolio flows: a global perspective," Working Paper Series 0651, European Central Bank.
  7. Börsch-Supan, Axel, 2004. "GLOBAL AGING - Issues, Answers, More Questions," Sonderforschungsbereich 504 Publications 07-28, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.

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