Hostname: page-component-8448b6f56d-jr42d Total loading time: 0 Render date: 2024-04-23T13:04:07.948Z Has data issue: false hasContentIssue false

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

Published online by Cambridge University Press:  27 May 2011

Carlo A. Favero
Bocconi University, Department of Finance, Innocenzo Gasparini Institute for Economic Research (IGIER), Via Sarfatti, 25, Milan 20136, Italy and Centre for Economic Policy Research (CEPR),
Arie E. Gozluklu
Bocconi University, Department of Finance, Milan 20136, Italy and University of Warwick,
Andrea Tamoni
Bocconi University, Department of Finance, Milan 20136, Italy,


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.

Research Articles
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


Abel, A. B. “The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security.” Econometrica, 71 (2003), 2, 551578.CrossRefGoogle Scholar
Ang, A., and Bekaert, G.. “Stock Return Predictability: Is It There?Review of Financial Studies, 20 (2007), 651707.CrossRefGoogle Scholar
Ang, A., and Maddaloni, A.. “Do Demographic Changes Affect Risk Premiums? Evidence from International Data.” Journal of Business, 78 (2005), 341380.CrossRefGoogle Scholar
Asness, C.Fight the Fed Model: The Relationship between Future Returns and Stock and Bond Market Yields.” Journal of Portfolio Management, 30 (2003), 1124.CrossRefGoogle Scholar
Bakshi, G. S., and Chen, Z.. “Baby Boom, Population Aging, and Capital Markets.” Journal of Business, 67 (1994), 165202.CrossRefGoogle Scholar
Bloom, D. E.; Canning, D.; and Sevilla, J.. The Demographic Dividend. A New Perspective on the Economic Consequences of Population Change. Santa Monica, CA: Rand Corporation (2003).CrossRefGoogle Scholar
Boudoukh, J.; Michaely, R.; Richardson, M.; and Roberts, M. R.. “On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing.” Journal of Finance, 62 (2007), 877915.CrossRefGoogle Scholar
Boudoukh, J.; Richardson, M.; and Whitelaw, R. F.. “The Myth of Long-Horizon Predictability.” Review of Financial Studies, 21 (2008), 15771605.CrossRefGoogle Scholar
Brooks, R.Asset-Market Effects of the Baby Boom and Social-Security Reform.” American Economic Review, 92 (2002), 402406.CrossRefGoogle Scholar
Bruggeman, A.; Donati, P.; and Warne, A.. “Is the Demand for Euro Area M3 Stable?” European Central Bank Working Paper Series No. 255 (2003).CrossRefGoogle Scholar
Campbell, J. Y. “A Variance Decomposition for Stock Returns.” Economic Journal, 101 (1991), 157179.CrossRefGoogle Scholar
Campbell, J. Y.; Lo, A. W.; and MacKinlay, A. C.. “The Econometrics of Financial Markets.” Princeton, NJ: Princeton University Press (1997).CrossRefGoogle Scholar
Campbell, J. Y., and Shiller, R. J.. “Stock Prices, Earnings, and Expected Dividends.” Journal of Finance, 43 (1988), 661676.CrossRefGoogle Scholar
Campbell, J. Y., and Thomson, S. B.. “Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?Review of Financial Studies, 21 (2008), 15091531.CrossRefGoogle Scholar
Campbell, J. Y., and Viceira, L. M.. Strategic Asset Allocation: Portfolio Choice for Long-Term Investors. Oxford, UK: Oxford University Press (2002).CrossRefGoogle Scholar
Cochrane, J. H. Asset Pricing. Princeton, NJ: Princeton University Press (2005).Google Scholar
Cochrane, J. H. “The Dog That Did Not Bark: A Defense of Return Predictability.” Review of Financial Studies, 21 (2008), 15331575.CrossRefGoogle Scholar
Davidson, R., and Flachaire, E.. “The Wild Bootstrap, Tamed at Last.” Journal of Econometrics, 146 (2008), 162169.CrossRefGoogle Scholar
DellaVigna, S., and Pollet, J. M.. “Demographics and Industry Returns.” American Economic Review, 97 (2007), 16671702.CrossRefGoogle Scholar
Diebold, F. X., and Mariano, R. S.. “Comparing Predictive Accuracy.” Journal of Business and Economic Statistics, 13 (1995), 253263.CrossRefGoogle Scholar
Erb, C. B.; Harvey, C. R.; and Viskanta, T. E.. “Demographics and International Investment.” Financial Analysts Journal, 53 (1996), 1428.CrossRefGoogle Scholar
Fama, E. F. “Efficient Capital Markets: A Review of Theory and Empirical Work.” Journal of Finance, 25 (1970), 383417.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Dividend Yields and Expected Stock Returns.” Journal of Financial Economics, 22 (1988), 325.CrossRefGoogle Scholar
Favero, C. A., and Tamoni, A.. “Demographics and the Term Structure of Stock Market Risk.” Available at (2010).Google Scholar
Geanakoplos, J.; Magill, M.; and Quinzii, M.. “Demography and the Long-Run Behavior of the Stock Market.” Brookings Papers on Economic Activities, 1 (2004), 241325.CrossRefGoogle Scholar
Goyal, A.Demographics, Stock Market Flows, and Stock Returns.” Journal of Financial and Quantitative Analysis, 39 (2004), 115142.CrossRefGoogle Scholar
Goyal, A., and Welch, I.. “Predicting the Equity Premium with Dividend Ratios.” Management Science, 49 (2003), 639654.CrossRefGoogle Scholar
Hansen, H., and Johansen, S.. “Some Tests for Parameter Constancy in Cointegrated VAR-Models.” Econometrics Journal, 2 (1999), 306333.CrossRefGoogle Scholar
Hodrick, R. J. “Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement.” Review of Financial Studies, 5 (1992), 357386.CrossRefGoogle Scholar
Hodrick, R. J., and Prescott, E. C.. “Postwar U.S. Business Cycles: An Empirical Investigation.” Journal of Money, Credit, and Banking, 29 (1997), 116.CrossRefGoogle Scholar
Jaimovich, N.; Pruitt, S.; and Siu, H. E.. “The Demand for Youth: Implications for the Hours Volatility Puzzle.” NBER Working Paper No. 14697 (2009).CrossRefGoogle Scholar
Johannes, M.; Korteweg, A.; and Polson, N.. “Sequential Learning, Predictive Regressions, and Optimal Portfolio Returns.” Available at SSRN: (2008).Google Scholar
Johansen, S.Statistical Analysis of Cointegrating Vectors.” Journal of Economic Dynamics and Control, 12 (1988), 231254.CrossRefGoogle Scholar
Johansen, S.Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models.” Econometrica, 59 (1991), 15511580.CrossRefGoogle Scholar
Lamont, O.Earnings and Expected Returns.” Journal of Finance, 53 (1998), 15631587.CrossRefGoogle Scholar
Lander, J.; Orphanides, A.; and Douvogiannis, M.. “Earnings Forecasts and the Predictability of Stock Returns: Evidence from Trading the S&P.” Journal of Portfolio Management, 23 (1997), 2435.CrossRefGoogle Scholar
Lettau, M., and Ludvigson, S.. “Consumption, Aggregate Wealth and Expected Stock Returns.” Journal of Finance, 56 (2001), 815849.CrossRefGoogle Scholar
Lettau, M., and Ludvigson, S. C.. “Expected Returns and Expected Dividend Growth.” Journal of Financial Economics, 76 (2005), 583626.CrossRefGoogle Scholar
Lettau, M., and Van Nieuwerburgh, S.. “Reconciling the Return Predictability Evidence.” Review of Financial Studies, 21 (2008), 16071652.CrossRefGoogle Scholar
MacKinnon, J. G.; Haug, A. A.; and Michelis, L.. “Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration.” Journal of Applied Econometrics, 14 (1999), 563577.3.0.CO;2-R>CrossRefGoogle Scholar
Mason, A., and Lee, R.. “Reform and Support Systems for the Elderly in Developing Countries: Capturing the Second Demographic Dividend.” Genus, 62 (2005), 1135.Google Scholar
Neely, C. J., and Weller, P. A.. “Predictability in International Asset Returns: A Reexamination.” Journal of Financial and Quantitative Analysis, 35 (2000), 601620.CrossRefGoogle Scholar
Nelson, C. R., and Kim, M. J.. “Predictable Stock Returns: The Role of Small Sample Bias.” Journal of Finance, 43 (1993), 641661.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “Automatic Lag Selection in Covariance Matrix Estimation.” Review of Economic Studies, 61 (1994), 631653.CrossRefGoogle Scholar
Nyblom, J.Testing for the Constancy of Parameters over Time.” Journal of the American Statistical Association, 84 (1989), 223230.CrossRefGoogle Scholar
Pastor, L., and Stambaugh, R. F.. “Are Stocks Really Less Volatile in the Long Run?” Working Paper, NBER 14757 (2009).CrossRefGoogle Scholar
Paye, B. S., and Timmermann, A.. “Instability of Return Prediction Models.” Journal of Empirical Finance, 13 (2006), 274315.CrossRefGoogle Scholar
Poterba, J. M. “Demographic Structure and Asset Returns.” Review of Economics and Statistics, 83 (2001), 565584.CrossRefGoogle Scholar
Rapach, D. E., and Wohar, M. E.. “In-Sample vs. Out-of-Sample Tests of Stock Return Predictability in the Context of Data Mining.” Journal of Empirical Finance, 13 (2006), 231247.CrossRefGoogle Scholar
Stambaugh, R. F. “Predictive Regressions.” Journal of Financial Economics, 54 (1999), 375421.CrossRefGoogle Scholar
Valkanov, R.Long-Horizon Regressions: Theoretical Results and Applications.” Journal of Financial Economics, 68 (2003), 201232.CrossRefGoogle Scholar
Welch, I., and Goyal, A.. “A Comprehensive Look at the Empirical Performance of Equity Premium Prediction.” Review of Financial Studies, 21 (2008), 14551508.CrossRefGoogle Scholar