Demographic Trends, the Dividend-Price Ratio and the Predictability of Long-Run Stock Market Returns

50 Pages Posted: 17 Mar 2010

See all articles by Carlo A. Favero

Carlo A. Favero

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

Arie Eskenazi Gozluklu

University of Warwick

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: March 2010

Abstract

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

Suggested Citation

Favero, Carlo A. and Gozluklu, Arie Eskenazi and Tamoni, Andrea, Demographic Trends, the Dividend-Price Ratio and the Predictability of Long-Run Stock Market Returns (March 2010). CEPR Discussion Paper No. DP7734. Available at SSRN: https://ssrn.com/abstract=1573438

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)

London
United Kingdom

Arie Eskenazi Gozluklu

University of Warwick ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://www.arieskenazi.com

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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