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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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D. E. Bloom ; D. Canning ; and J. Sevilla . The Demographic Dividend. A New Perspective on the Economic Consequences of Population Change. Santa Monica, CA: Rand Corporation (2003).

J. Y. Campbell , and L. M. Viceira . Strategic Asset Allocation: Portfolio Choice for Long-Term Investors. Oxford, UK: Oxford University Press (2002).

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
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