Asset Pricing Implications of Demographic Change

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