Asset Pricing Implications of Demographic Change
94 Pages Posted: 11 May 2011 Last revised: 12 Oct 2018
Date Written: October 5, 2018
Abstract
I solve an overlapping generations model with stochastic birth and death rates in general equilibrium. I provide sufficient conditions so that the interest rate is decreasing in the birth and increasing in the death rate. If preferences are non-time-separable, stochastic changes in birth and death rates are priced in financial markets and the equity premium is increasing in the birth and decreasing in the death rate. Demographic changes generate a positive and sizable bond term premium and time series variation in the interest rate and equity premium. Using a balanced panel of 18 countries from 1981 to 2011, I document that the qualitative results in the model are consistent with the data.
Keywords: baby boom, demographic, transition, uncertainty, overlapping generations, intertemporal consumption choice, long run risk, general equilibrium
JEL Classification: G11, G12, G17, D51, D91
Suggested Citation: Suggested Citation
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