Inflation, Stock Market and Long-Term Investors: Real Effects of Changing Demographics
Arie Eskenazi Gozluklu
Warwick Business School; Bocconi University
Paris December 2011 Finance Meeting EUROFIDAI - AFFI
This paper shows the common demographic component shared by equity and bond yields. Life-cycle patterns in investment behavior appear as predictable components in financial yields and inflation. The slow-evolving time-series covariation due to changing population age structure explains two empirical puzzles: i) strong comovement between equity and bond markets, ii) positive correlation between equity yields and inflation. Out-of-sample forecasts, VAR simulations and predictive regressions support this conjecture. Specifications including both financial yields and a model-based demographic variable improve both equity and bond return predictability. A cross-country panel documents the cross-sectional variation of the demographic effect and explains the differences in comovement between equity and bond markets across countries.
Number of Pages in PDF File: 51
Keywords: demographics, inflation illusion, Fed model, return predictability, equity-bond comovement
JEL Classification: E27, E31, E44, G11, G12working papers series
Date posted: October 12, 2011 ; Last revised: May 28, 2012
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