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

  • Carlo A. Favero (a1), Arie E. Gozluklu (a2) and Andrea Tamoni (a3)

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.

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
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