Demographics and US stock market fluctuations

This paper illustrates how the information component determining long-horizon US stock market returns can be related to a demographic variable, MY the ratio of middle-aged to young adults. In fact, MY can be seen as the major determinants of a slowly evolving time-varying mean of the dividend price ratio. A forecasting model for stock market returns over a century of US annual data that uses as predictors the dividend price ratio and MY overcomes all the statistical difficulties related to the high persistence of the dividend-price ratio and performs very well in forecasting long-horizon stock market returns. Moreover, the use of demographic variables as a predictor for long-run stock market returns delivers a steeply downward sloping term structure of stock market risk.