Working Paper: CEPR ID: DP7734
Authors: Carlo A. Favero; Arie Gozluklu; Andrea Tamoni
Abstract: This paper documents the existence of a slowly evolving trend in the dividend-price 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 long-horizon 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.
Keywords: Demographics; Dynamic Dividend Growth Model; Long Run Returns Predictability
JEL Codes: C10; C11; C19; C22; C53; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| middle-aged to young ratio (my) (J11) | dividend-price ratio (DPT) (G35) |
| dividend-price ratio (DPT) (G35) | stock market returns (G17) |
| middle-aged to young ratio (my) (J11) | stock market returns (G17) |
| deviations of DPT from its long-run mean (C22) | stock market returns (G17) |