Demographics and financial asset prices in the major industrial economies

Abstract

This paper explores the relationship between demographics and aggregate financial asset prices in 7 OECD countries over the past 50 years. Unlike most extant work it adopts an international as well as US focus, and also includes non-demographic variables usually considered to influence asset prices in the econometric specification. Furthermore, we examine effects on bond yields as well as share prices. The results indicate a significant link between panel, international and US demographics on the one hand, and real stock prices and real bond yields on the other. The international results are of particular interest given their robustness and the logic of international financial integration. Generally, an increase in the fraction of middle-aged people (aged 40-64) tends to boost real asset prices. A corollary is that a decline in this cohort in coming decades will tend to weaken them. More tentative results including estimated effects of the over-65 cohort in the US suggest a more severe downturn is possible, thus underlining the potential market risks associated with sole reliance on fully funded pension schemes.