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Attention, Demographics, and the Stock Market

56 Pages Posted: 26 Apr 2005  

Stefano DellaVigna

University of California, Berkeley; National Bureau of Economic Research (NBER)

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2005

Abstract

Do investors pay enough attention to long-term fundamentals? We consider the case of demographic information. Cohort size fluctuations produce forecastable demand changes for age-sensitive sectors, such as toys, bicycles, beer, life insurance, and nursing homes. These demand changes are predictable once a specific cohort is born. We use lagged consumption and demographic data to forecast future consumption demand growth induced by changes in age structure. We find that demand forecasts predict profitability by industry. Moreover, forecasted demand changes 5 to 10 years in the future predict annual industry returns. One additional percentage point of annualized demand growth due to demographics predicts a 5 to 10 percentage point increase in annual abnormal industry stock returns. However, forecasted demand changes over shorter horizons do not predict stock returns. The predictability results are more substantial for industries with higher barriers to entry and with more pronounced age patterns in consumption. A trading strategy exploiting demographic information earns an annualized risk-adjusted return of 5 to 7 percent. We present a model of underreaction to information about the distant future that is consistent with the findings.

Suggested Citation

DellaVigna, Stefano and Pollet, Joshua Matthew, Attention, Demographics, and the Stock Market (March 2005). NBER Working Paper No. w11211. Available at SSRN: https://ssrn.com/abstract=689392

Stefano DellaVigna (Contact Author)

University of California, Berkeley ( email )

Economics Department
549 Evans Hall #3880
Berkeley, CA 94720
United States
510-643-0715 (Phone)
510-642-6615 (Fax)

HOME PAGE: http://emlab.berkeley.edu/users/sdellavi/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 344-4311 (Phone)

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