Monday, 9 May 2011

Demographics, financial markets and the economy

Wesley Gray at the Empirical Finance Blog brings to our attention a recent paper by Robert Arnott and Denis Chaves entitled "Demographic Changes, Financial Markets, and the Economy".

From the abstract of the paper:

... In our work, we find that a growing roster of young adults (age 15–49) is very good for GDP growth, a growing roster of older workers is a little bad for GDP growth, and a growing roster of young children or senior citizens is very bad for GDP growth.

We find surprisingly powerful results when we apply the same technique for exploring the links between demography and capital markets returns, net of the strong and well-documented effects of valuation and yield levels. Stocks perform best when the roster of people age 35–59 is particularly large, and when the roster of people age 45–64 is fast-growing. Bonds follow a similar pattern, with an age-shift: they’re best when the roster of people age 50–69 is growing quickly...

The authors use their results to make some forecasts for GDP growth and market returns in a number of countries. From the conclusion:

... Our projections are bleak in the case of GDP growth for most of the developed world. The developed countries, and Japan in particular, have alarmingly low birth rates and high number of retirees. But, especially for the younger of the developed economies, the picture is relatively good for bonds and mixed in the case of stocks...

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