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Aging and Asset Prices

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  • Axel Börsch-Supan

    ()

  • Alexander Ludwig

    ()

  • Mathias Sommer

    ()
    (Munich Center for the Economics of Aging (MEA))

Abstract

This study quantifies the potential effects of aging on asset prices using a sophisticated overlapping generations (OLG) model with international diversification reflecting the global nature of capital markets. We show that the expected decline in the returns to capital will depend on the degree of international diversification. In the case of optimal diversification within the EU returns will drop by around one percentage point until 2035. The increasing risk aversion of an aging society will lead to differential effects on the returns on stocks and on bonds. We estimate the equity premium to rise by around 70 base points over the next 25 years. The sector that will be affected most by the demographic trend will be returns on real estate, however, only in the very long term. The main insight is that household size lags population size by about 20 years. One reason is that an older society features a smaller household size and thus, ceteris paribus, more households. Hence, housing demand will only begin to fall from 2025 onwards even if populations start declining today. Taken all evidence together, capital markets are not immune to demography. Rates of return will decline in response to demographic forces, but only very moderately. There is no scientific reason to assume that a major “asset meltdown” will occur when the babyboom generation retires.

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Bibliographic Info

Paper provided by Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy in its series MEA discussion paper series with number 07129.

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Date of creation: 03 Jul 2007
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Handle: RePEc:mea:meawpa:07129

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Postal: Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy, Amalienstraße 33, 80799 München, Germany
Phone: +49/89/38602.442
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References

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  1. Börsch-Supan, Axel & Ludwig, Alexander & Winter, Joachim, 2001. "Aging, pension reform, and capital flows: A multi-country simulation model," Sonderforschungsbereich 504 Publications 01-08, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  2. Robin Brooks, 2002. "Asset-Market Effects of the Baby Boom and Social-Security Reform," American Economic Review, American Economic Association, vol. 92(2), pages 402-406, May.
  3. Börsch-Supan, Axel & Ludwig, Alexander & Winter, Joachim, 2001. "Aging and International Capital Flows," Discussion Papers 605, Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre.
  4. Richard K. Green & Patric H. Hendershott, 1995. "Age, Housing Demand, and Real House Prices," Wisconsin-Madison CULER working papers 96-09, University of Wisconsin Center for Urban Land Economic Research.
  5. Börsch-Supan, Axel H. & Heiss, Florian & Ludwig, Alexander & Winter, Joachim, 2003. "Pension reform, capital markets and the rate of return," Munich Reprints in Economics 20200, University of Munich, Department of Economics.
  6. Börsch-Supan, Axel & Ludwig, Alexander & Winter, Joachim, 2004. "Aging, Pension Reform, and Capital Flows:," Sonderforschungsbereich 504 Publications 04-65, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  7. Robin Brooks, 2004. "The Equity Premium and the Baby Boom," Econometric Society 2004 North American Winter Meetings 155, Econometric Society.
  8. Axel Börsch-Supan & Anette Reil-Held & Ralf Rodepeter & Reinhold Schnabel & University of Mannheim & Germany, 2000. "Household Savings in Germany," Macroeconomics 0004053, EconWPA.
  9. Berkelaar, A.B. & Kouwenberg, R.R.P., 2000. "Dynamic asset allocation and downside-risk aversion," Econometric Institute Research Papers EI 2000-12/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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Citations

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Cited by:
  1. Narciso, Alexandre, 2010. "The impact of population ageing on international capital flows," MPRA Paper 26457, University Library of Munich, Germany.
  2. Mosolygó, Zsuzsa, 2009. "A népességöregedés, a vagyonzsugorodási hipotézis és a világgazdasági válság
    [Population ageing, shrinking-wealth hypothesis, and world economic crisis]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 866-880.
  3. 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.

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