Demographics and the Term Structure of Stock Market Risk

28 Pages Posted: 22 Feb 2010 Last revised: 20 May 2010

Andrea Tamoni

London School of Economics & Political Science (LSE)

Carlo A. Favero

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Date Written: February 22, 2010

Abstract

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.

Keywords: Dynamic Dividend Growth Model, Long Run Returns Predictability, Demographics

JEL Classification: G14, G19, C10, C11, C22, C53

Suggested Citation

Tamoni, Andrea and Favero, Carlo A., Demographics and the Term Structure of Stock Market Risk (February 22, 2010). Available at SSRN: https://ssrn.com/abstract=1557008 or http://dx.doi.org/10.2139/ssrn.1557008

Andrea Tamoni

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
02079557303 (Phone)

Carlo A. Favero (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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