Demographics and the Term Structure of Stock Market Risk

This paper documents the existence of a slowly evolving trend in the dividend-price ratio, dp, determined by a demographic variable, MY: the middle-aged to young ratio. Deviations of the dividend-price ratio from this slowly evolving long-run component explain transitory but persistent long-horizon fluctuations in stock market returns. The relation between MY and the dividend-price is a prediction of an overlapping generation model. Yhe joint significance MY and dp in long-horizon forecasting regressions for stock market returns explain the mixed evidence on the ability of the dividend-price ratio to predict stock returns and provide a model-based interpretation of statistical corrections for breaks in the mean of this financial ratio