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Aging and Asset Prices

  • Axel Börsch-Supan

    ()

  • Alexander Ludwig

    ()

  • Mathias Sommer

    ()

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

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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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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Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy, Amalienstraße 33, 80799 München, Germany

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  1. Axel Börsch-Supan & Alexander Ludwig & Joachim Winter, 2005. "Aging, Pension Reform, and Capital Flows: A Multi-Country Simulation Model," DNB Working Papers 065, Netherlands Central Bank, Research Department.
  2. Börsch-Supan, Axel & Ludwig, Alexander & Winter, Joachim, 2001. "Aging and International Capital Flows," Discussion Papers 605, Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre.
  3. Giovanni L. Violante & Orazio P. Attanasio, 2000. "The Demographic Transition in Closed and Open Economies: A Tale of Two Regions," Research Department Publications 4194, .
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  8. Green, Richard & Hendershott, Patric H., 1996. "Age, housing demand, and real house prices," Regional Science and Urban Economics, Elsevier, vol. 26(5), pages 465-480, August.
  9. Zvi Bodie & Robert C. Merton & William F. Samuelson, 1992. "Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model," NBER Working Papers 3954, National Bureau of Economic Research, Inc.
  10. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  11. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," Review of Economic Studies, Oxford University Press, vol. 25(2), pages 65-86.
  12. James M. Poterba, 2001. "Demographic Structure And Asset Returns," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 565-584, November.
  13. Pemberton, James, 1999. "Social Security: National Policies with International Implications," Economic Journal, Royal Economic Society, vol. 109(457), pages 492-508, July.
  14. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  15. 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.
  16. Hamilton, Bruce W., 1991. "The baby boom, the baby bust, and the housing market A second look," Regional Science and Urban Economics, Elsevier, vol. 21(4), pages 547-552, December.
  17. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  18. Robin Brooks, 2004. "The Equity Premium and the Baby Boom," Econometric Society 2004 North American Winter Meetings 155, Econometric Society.
  19. Axel Börsch-Supan & Anette Reil-Held & Ralf Rodepeter & Reinhold Schnabel & University of Mannheim & Germany, 2000. "Household Savings in Germany," Macroeconomics 0004053, EconWPA.
  20. 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.
  21. 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.
  22. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
  23. Andrew B. Abel, 2002. "The effects of a baby boom on stock prices and capital accumulation in the presence of Social Security," Working Papers 03-2, Federal Reserve Bank of Philadelphia.
  24. Börsch-Supan, Axel & Heiss, Florian & Winter, Joachim, 2000. "Pension reform, capital markets, and the rate of return," Discussion Papers 589, Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre.
  25. Equipe INGENUE, 2001. "Macroeconomic consequences of pension reforms in Europe: an investigation with the INGENUE world model," CEPREMAP Working Papers (Couverture Orange) 0116, CEPREMAP.
  26. Equipe INGENUE, 2001. "Macroeconomic consequences of pension reforms in Europe: an investigation with the INGENUE world model," Documents de Travail de l'OFCE 2001-07, Observatoire Francais des Conjonctures Economiques (OFCE).
  27. Higgins, Matthew, 1998. "Demography, National Savings, and International Capital Flows," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 343-69, May.
  28. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
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