Demography and the Long-Run Predictability of the Stock Market

Abstract

This paper was begun during a visit at the Cowles Foundation in Fall 2000 and revised during a visit in Fall 2002: Michael Magill and Martine Quinzii are grateful for the stimulating environment and the research support provided by the Cowles Foundation. We are also grateful to Bob Shiller for helpful discussions, and to participants at the Cowles Conference on Incomplete Markets at Yale University, the SITE Workshop at Stanford University, the Incomplete Markets Workshop at SUNY Stony Brook during the summer 2001, the Southwest Economic Conference at UCLA, and the Conference for the Advancement of Economic Theory at Rhodes in 2003 for helpful comments. Many thanks to Bill Brainard whose numerous insightful questions and comments greatly improved the final version of the paper. Unfortunately the authors are solely responsible for the remaining weaknesses.

Some Evidence on Secular Drivers of US Safe Real Rates

“…Those correlates are: labor productivity growth (confirms results with TFP); the change of the U.S. and world dependency ratios and the level and difference of U.S. and world values of Geanakoplos's (2004) MY ratio (confirm results with the level and change of middle age ratios); Federal deficit/GDP and world debt/GDP (confirm results with Federal primary deficit/GDP and US debt/GDP).…”

“…26 of these have expected sign, and most though not all are significant. In terms of support for demographic variables as correlates of real rates, these results fall roughly midway between the regression results of Poterba (2001) on the one hand, who finds modest support for demographic variables, and Geanakoplos et al (2004) and Favero et al (2016) on the other, who find exceptionally strong support. Table 3 and line (5c) of Table 4 reflect long periods when the two moved in opposite directions: the mid-1900's-mid 1920 's, 1930-1970, and the mid-1980's-2016. Note that the trend value of this correlate moves quite slowly.…”

“…An increase in the dependency ratio will shift the savings schedule in, thus raising r (Gagnon et al (2016)); an increase of the fraction middle aged will work in the opposite direction. Geanakoplos et al (2004) argue that changes in what they call the middle to young ratio will be positively correlated with r; we conclude from their study that the change in the fraction middle aged will also be positively correlated with r.…”

Political Preferences and the Aging of Populations

“…Several studies have also empirically tested the validity of this proposition, yet the results are very mixed. Bakshi and Chen (1994) and Geanakopolos et al (2004) have found evidence of a negative relationship between age structure and stock market returns in the case of the United States. Looking at U.S. data as well, Poterba (2001Poterba ( , 2004 on the other hand could not find any strong econometric evidence that asset returns react to demographic variables.…”

Secular Stagnation? Growth, Asset Returns and Welfare in the Next Decades: First Results

“…Relative to this literature, the main novel aspect in our work is to explicitly model differential asset returns. We thereby relate to a literature on aging and the equity premium (Bakshi and Chen 1994;Brooks 2004;Börsch-Supan, Ludwig, and Sommer 2003;Geanakoplos, Magill, and Quinzii 2004;Kuhle 2008) which has not reached a consensus on the quantitative effects of demographic change on differential asset returns. While Brooks (2004) reports substantial increases in the equity premium, the approximate calculations in Börsch-Supan, Ludwig, and Sommer (2003) rather suggest a small increase.…”