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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 ,
Arie E. Gozluklu  and
Andrea Tamoni
Carlo A. Favero
Affiliation:
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), carlo.favero@unibocconi.it
Arie E. Gozluklu
Affiliation:
Bocconi University, Department of Finance, Milan 20136, Italy and University of Warwick, arie.gozluklu@unibocconi.it
Andrea Tamoni
Affiliation:
Bocconi University, Department of Finance, Milan 20136, Italy, andrea.tamoni@unibocconi.it.
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Abstract

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.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 5 , October 2011 , pp. 1493 - 1520
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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