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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 E.
  • Tamoni, Andrea

Abstract

This paper documents the existence of a slowly evolving trend in the log dividend-price ratio, DPt, determined by a demographic variable, MYt: 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 MYt 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 explains 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.

Suggested Citation

  • Favero, Carlo A. & Gozluklu, Arie E. & Tamoni, Andrea, 2011. "Demographic Trends, the Dividend-Price Ratio, and the Predictability of Long-Run Stock Market Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(5), pages 1493-1520, October.
    • Handle: RePEc:cup:jfinqa:v:46:y:2011:i:05:p:1493-1520_00
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    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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