Abstract

The impact of demographic changes on the economic and financial system of a country is widely recognized. While demographic effects have been widely incorporated, for instance in the valuation of insurance-like products, as well as simulations of future Social Security benefits, less work has been carried out on the effects of demography on financial asset prices. This thesis brings a contribution to the ongoing debate among researchers about the link between stock prices and demographic changes.

Simulations carried over on a calibrated overlapping generations model with growing population, show that the simple occurrence of a non stationary population will have implications for the pricing of financial assets, even in an economy where output and population grow at identical rates. More specifically, a permanent increase in the population growth rate (which increases the fraction of young population) is attended by lower equity and risk free securities prices and correspondingly higher means returns.

The empirical study of the link between demographic changes and asset prices find strong empirical evidence that demographic changes predict future excess returns in international data. However, the demographic variables that predict US excess returns are not the same demographic variables that predict excess returns on other countries. The most powerful predictive demographic variable for international excess returns is the change in the proportion of retired people, as a fraction of the adult population. A growing proportion of retired people significantly forecasts decreases in the equity premium over one, two and five years forecast horizons.