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 dividendprice 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 longhorizon 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.