Demographics and the Term Structure of Stock Market Risk
London School of Economics & Political Science (LSE)
Carlo A. Favero
Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)
February 22, 2010
This paper documents the existence of a slowly evolving trend in the dividend-price ratio, dp, determined by a demographic variable, MY: the middle-aged to young ratio. Deviations of the dividend-price ratio from this slowly evolving long-run component explain transitory but persistent long-horizon fluctuations in stock market returns. The relation between MY and the dividend-price is a prediction of an overlapping generation model. Yhe joint significance MY and dp in long-horizon forecasting regressions for stock market returns explain the mixed evidence on the ability of the dividend-price ratio to predict stock returns and provide a model-based interpretation of statistical corrections for breaks in the mean of this financial ratio.
Number of Pages in PDF File: 28
Keywords: Dynamic Dividend Growth Model, Long Run Returns Predictability, Demographics
JEL Classification: G14, G19, C10, C11, C22, C53working papers series
Date posted: February 22, 2010 ; Last revised: May 20, 2010
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