Attention, Demographics, and the Stock Market

52 Pages Posted: 7 Jun 2005

See all articles by Joshua Matthew Pollet

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance

Stefano DellaVigna

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

Multiple version iconThere are 2 versions of this paper

Date Written: March 15, 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 stock 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.

Keywords: Behavioral finance, demographics, limited attention, foresight

Suggested Citation

Pollet, Joshua Matthew and DellaVigna, Stefano, Attention, Demographics, and the Stock Market (March 15, 2005). Available at SSRN: https://ssrn.com/abstract=735484 or http://dx.doi.org/10.2139/ssrn.735484

Joshua Matthew Pollet (Contact Author)

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

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Champaign, IL 61820
United States
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Stefano DellaVigna

University of California, Berkeley ( email )

Economics Department
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Berkeley, CA 94720
United States
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510-642-6615 (Fax)

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

National Bureau of Economic Research (NBER)

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