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Aging and Asset Prices

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  • Börsch-Supan, Axel

    () (Sonderforschungsbereich 504)

  • Ludwig, Alexander

    () (Mannheim Research Institute for the Economics of Aging (MEA) and Sonderforschungsbereich 504)

  • Sommer, Mathias

    () (Sonderforschungsbereich 504)

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.

Suggested Citation

  • 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.
  • Handle: RePEc:xrs:sfbmaa:07-29
    Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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    Cited by:

    1. 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.
    2. 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.
    3. Narciso, Alexandre, 2010. "The impact of population ageing on international capital flows," MPRA Paper 26457, University Library of Munich, Germany.

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