Demographic Trends, the Dividend-Price Ratio and the Predictability of Long-Run Stock Market Returns
50 Pages Posted: 17 Mar 2010
Date Written: March 2010
This paper documents the existence of a slowly evolving trend in the dividend-price ratio, dpt, determined by a demographic variable, MY: the middle-aged to young ratio. Deviations of dpt from this long-run component explain transitory but persistent fluctuations in stock market returns. The relation between MY and dpt is a prediction of an overlapping generation model. The joint significance of MY and dpt in long-horizon forecasting regressions for market returns explain the mixed evidence on the ability of dpt to predict stock returns and provide a model-based interpretation of statistical corrections for breaks in the mean of this financial ratio.
Keywords: demographics, dynamic dividend growth model, long run returns predictability
JEL Classification: C10, C11, C19, C22, C53, G14
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