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The Equity Premium and the Baby Boom

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  • Robin Brooks

Abstract

This paper explores the quantitative impact of the Baby Boom on stock and bond returns. It constructs a neoclassical growth model with overlapping generations, in which agents make a portfolio decision over risky capital and safe bonds in zero net supply. The model has exogenous technology and population shocks that are calibrated to match long run data for the US. With agents allowed to borrow freely by shorting bonds, the model fails to match the historical equity premium by a large margin and generates only small asset market effects over a simulated Baby Boom. When agents are constrained in their ability to borrow, the model comes close to matching the historical equity premium and suggests that there will be a sharp rise in the equity premium when the Baby Boomers retire, driven by a large decline in bond returns as Baby Boomers seek to hold the riskless asset in retirement

Suggested Citation

  • Robin Brooks, 2004. "The Equity Premium and the Baby Boom," Econometric Society 2004 North American Winter Meetings 155, Econometric Society.
    • Handle: RePEc:ecm:nawm04:155
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    File URL: http://repec.org/esNAWM04/up.25430.1048539824.pdf
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    Cited by:

    1. Börsch-Supan, Axel & Ludwig, Alexander & Sommer, Mathias, 2005. "Aging and Asset Prices," Sonderforschungsbereich 504 Publications 07-29, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    2. Elod Takats, 2010. "Ageing and asset prices," BIS Working Papers 318, Bank for International Settlements.
    3. Börsch-Supan, Axel, 2004. "Global Aging: Issues, Answers, More Questions," MEA discussion paper series 04055, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    4. Geppert, Christian & Ludwig, Alexander & Abiry, Raphael, 1970. "Secular Stagnation? Growth, Asset Returns and Welfare in the Next Decades: First Results," MEA discussion paper series 201605, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    5. Andrew Ang & Angela Maddaloni, 2005. "Do Demographic Changes Affect Risk Premiums? Evidence from International Data," The Journal of Business, University of Chicago Press, vol. 78(1), pages 341-380, January.
    6. Wolfgang Kuhle, 2008. "Demography and Equity Premium," MEA discussion paper series 08157, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    7. De Santis, Roberto A. & Lührmann, Melanie, 2006. "On the determinants of external imbalances and net international portfolio flows: a global perspective," Working Paper Series 651, European Central Bank.
    8. Börsch-Supan, Axel, 2004. "Global aging : issues, answers, more questions," Papers 07-28, Sonderforschungsbreich 504.
    9. Börsch-Supan, Axel, 2004. "GLOBAL AGING - Issues, Answers, More Questions," Sonderforschungsbereich 504 Publications 07-28, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    10. De Santis, Roberto A. & Lührmann, Melanie, 2009. "On the determinants of net international portfolio flows: A global perspective," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 880-901, September.
    11. Ludwig, Alexander & Geppert, Christian & Abiry, Raphael, 2016. "Secular Stagnation? Growth, Asset Returns and Welfare in the Next Decades," VfS Annual Conference 2016 (Augsburg): Demographic Change 145764, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Equity premium; population aging; portfolio choice;
    All these keywords.

    JEL classification:

    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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