TY  - JOUR
AU  - DellaVigna,Stefano
AU  - Pollet,Joshua M.
TI  - Attention, Demographics, and the Stock Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11211
PY  - 2005
Y2  - March 2005
UR  - http://www.nber.org/papers/w11211
L1  - http://www.nber.org/papers/w11211.pdf
N1  - Author contact info:
Stefano DellaVigna
University of California, Berkeley
Department of Economics
549 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/643-0715
Fax: 510/642-6615
E-Mail: sdellavi@econ.berkeley.edu

Joshua Pollet
College of Business
University of Illinois at Urbana-Champaign
4039 BIF
515 E. Gregory Drive
Champaign, IL 61820
Tel: 217-300-1961
E-Mail: pollet@illinois.edu
AB  - Do investors pay enough attention to long-term fundamentals? We consider the case of demographic information. Cohort size fluctuations produce forecastable demand changes for age-sensitive sectors, such as toys, bicycles, beer, life insurance, and nursing homes. These demand changes are predictable once a specific cohort is born. We use lagged consumption and demographic data to forecast future consumption demand growth induced by changes in age structure. We find that demand forecasts predict profitability by industry. Moreover, forecasted demand changes 5 to 10 years in the future predict annual industry returns. One additional percentage point of annualized demand growth due to demographics predicts a 5 to 10 percentage point increase in annual abnormal industry stock returns. However, forecasted demand changes over shorter horizons do not predict stock returns. The predictability results are more substantial for industries with higher barriers to entry and with more pronounced age patterns in consumption. A trading strategy exploiting demographic information earns an annualized risk-adjusted return of 5 to 7 percent. We present a model of underreaction to information about the distant future that is consistent with the findings.
ER  -