Discussion paper

DP7734 Demographic Trends, the Dividend-Price Ratio and the Predictability of Long-Run Stock Market Returns

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.

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Citation

Favero, C, A Gozluklu and A Tamoni (2010), ‘DP7734 Demographic Trends, the Dividend-Price Ratio and the Predictability of Long-Run Stock Market Returns‘, CEPR Discussion Paper No. 7734. CEPR Press, Paris & London. https://cepr.org/publications/dp7734