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

Author(s): Carlo A. Favero, Arie Gozluklu, Andrea Tamoni
Publication Date: March 2010
Keyword(s): demographics, dynamic dividend growth model, long run returns predictability
JEL(s): C10, C11, C19, C22, C53, G14
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7734

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.