Demography and the Long-Run Predictability of the Stock Market

Abstract

Stock market price/earnings ratios should be influenced by demography. Since demography is predictable, stock returns should be as well. We provide a simple stochastic OLG model with a cyclical structure which generates cyclical P/E ratios. We calibrate the model to roughly fit the cyclical features of historical P/E ratios.

Keywords: Demography, Price Earnings Ratio, Returns, Efficient Markets, Baby-boom, Savings

JEL Classification: E21, E32, E43, E44, G12, J11