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Demographic Trends, the Dividend-Price Ratio, and the Predictability of Long-Run Stock Market Returns

  • Favero, Carlo A.
  • Gozluklu, Arie E.
  • Tamoni, Andrea

This paper documents the existence of a slowly evolving trend in the log dividend-price ratio, DP null , determined by a demographic variable, MY null : the middle-aged to young ratio. Deviations of DP null from this long-run component explain transitory but persistent fluctuations in stock market returns. The relation between MY null and DP null is a prediction of an overlapping generation model. The joint significance of MY and DP null in long-horizon forecasting regressions for market returns explains the mixed evidence on the ability of DP null 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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Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 46 (2011)
Issue (Month): 05 (November)
Pages: 1493-1520

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Handle: RePEc:cup:jfinqa:v:46:y:2011:i:05:p:1493-1520_00
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