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 log dividend-price ratio, dp_{t}, determined by a demographic variable, MY_{t}: the middle-aged to young ratio. Deviations of dp_{t} from this long-run component explain transitory but persistent fluctuations in stock market returns. The relation between MY_{t} and dp_{t} is a prediction of an overlapping generation model. The joint significance of MY and dp_{t} in long-horizon forecasting regressions for market returns explain the mixed evidence on the ability of dp_{t} to predict stock returns and provide a model-based interpretation of statistical corrections for breaks in the mean of this financial ratio.