Demographic trends, the dividend-price ratio, and the predictability of long-run stock market returns

Carlo A. Favero, Arie E. Gozluklu, Andrea Tamoni

Research output: Contribution to journalArticlepeer-review

18 Scopus citations

Abstract

This paper documents the existence of a slowly evolving trend in the log dividend-price ratio, DPt, determined by a demographic variable, MYt: 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 MYt 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 explains 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.

Original languageEnglish (US)
Pages (from-to)1493-1520
Number of pages28
JournalJournal of Financial and Quantitative Analysis
Volume46
Issue number5
DOIs
StatePublished - Oct 2011
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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