國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
1. Introduction
There are many impacts of demographic change to a country’s economic health.
An aging population’s potential effects on labor supply, employment, social security, levels of aggregate consumption and saving are of interest not only to academics but to policy analysts. Despite actuaries have long recognized the need for factoring demographic characteristics into payment schedules, less is widely accepted about the effect of demographics on asset markets.
The intuition behind the link between changing demographics and financial asset prices is the life cycle hypothesis of demand, pioneered by Franco Modigliani, which suggests in the early stage of life (25~44), people are likely to be net borrowers.
Therefore financial asset prices would decline or be unaffected as the age group increases. The middle-aged (45~64) are involved heavily in accumulation of net assets because they are at the peak of their earnings potential, and likely to be saving for retirement. An increase in the size of this group would lead to a higher demand for financial assets, stocks and bonds, resulting to an increase in financial asset prices.
Finally, as the age group enters retirement (65+), they start to decumulate their wealth.
As a result, financial asset prices could come under downward pressure. Special interest is drawn toward claims that the aging of the "baby boom" cohort is a key factor in
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
explaining the rise in asset values such as the sharp rise in US stock prices in the 1990s.
This has been supported by many authors such as Dent (1993), Shiller (2000), and Sterling and Waite (1998) who suggest that this pattern is due to the baby-boom cohort which had entered their prime earning years and begun saving for retirement. And by predictions that asset prices will decline when this group reaches retirement age and begins to reduce its asset holdings (see Davis and Li (2003)).
Population aging
The trend of population aging and the possible consequences had long been cried out by many researches. World Population Ageing (2013)1 declare that population ageing is concurrently taking place in nearly all the countries of the world and has major social and economic consequences. The old-age support ratios2 were already low in the more developed regions and are expected to continue to fall in the coming decades with ensuing fiscal pressures on support systems for older persons. Most of developed countries, including US, witnessed an acceleration of population growth in the 1950s (see Chart 1), followed by a decline during the late 1960s. Such slowing pace of population growth could be a pressure to the health of demographic structure.
1 United Nations, Department of Economic and Social Affairs, Population Division, World Population Ageing committee 2013
2 number of working-age adults per older person in the population
‧
Chart 1. The U.S. Population growth rate after great recession
Source: US Census Bureau
Separately, life expectancy had increased gradually since 1950 by the improvement of medical techniques. Chart 3 shows, life expectancy has increased by 15 years in the last 50 years. By the end of 2014, the life expectancy at birth have reach the nearly 80 years old, resulting the ever-urged necessity to save for retirement.
Chart 3. Life expectancy at birth in US
Source:U.S. Dept. of Commerce, Bureau of the Census,Historical Statistics of the United States.
51.9
1929 1939 1949 1959 1969 1979 1989 1999
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Baby-boom cohort
Given the importance to population structure of the high levels of births from late-1940s to mid-60s, and the subsequent decline in fertility, the baby boom generation-those born in roughly the two decades following World War II-has had and will continue to have important effects on the U.S. economy. At its youth stage, this group placed high demands on infrastructure for education and other types of training. The entry of this large cohort into the labor market may have been associated with an increase in the aggregate unemployment rate.
During the 1990’s, the baby boom generation entered its peak savings years.
Individuals aged between 40 and 60 years old are the prime savers of the economy in the US. Several theoretical models have argued that the baby boom generation was a contributing factor to the high stock returns and the large increase in stock prices observed from 1990 to 1999 (see graph 1).However, after years of prosperity, this cohort is going to retire (first wave come in 2011, as the people born in 1946 have reached retirement age, see graph 2). Concerns have been raise about how this ever- large retired cohort would impact the financial market.
Graph 1. Population pyramid 1990 Graph 2. Population pyramid 2010
Source: United Nations, Department of Economic and Social Affairs, Population Division. World Population Prospects: The 2012 Revision.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
In this context, this paper seeks to investigate empirically the impact of demographic changes on stock market returns. More specifically, we examine the potential links of changes in three age groups, young (25~44), middle (45~64) and retired (65+) to stock returns among portfolios formed by six equity features: (1) beta (2) size (3) B/M (4) D/P (5) volatility (6) non-systematic risk.
The structure of this paper is as follows: Latter in this Section, we present the historical evolution of the population structure in the US. Section 2 does a review of the theoretical and empirical literature on demographics and financial asset demands, including aspects of the life cycle hypothesis and the potential linkage of demographic changes and equity returns. Section 3 presents the sources of data we use and explain the methodology of this study. Section 4 tests empirically the relation between demographics and equity returns in US. With the construction of portfolio by different characteristics, we try to reveal hidden information within reaction of equity return.
‧
國立 政 治 大 學