Demographic Change, and the Equity Premium
This papers presents an analysis of the financial market effects of demographic change. We first develop a stylized overlapping generations model to derive qualitative general equilibrium predictions on the effects of demographic change on the equity premium, the return differential between a risky and a risk-free investment. As our key insight, we show that the exante equity premium increases when a smaller cohort enters the economy. We then develop a large scale overlapping generations model to provide a realistic quantitative assessment of the effects of demographic change on the equity premium for the U.S. economy. Our simulation model predicts that the expected rate of return to risky physical capital decreases by roughly 1.2 percentage points until 2030 and that the equity premium increases by about 0.28 percentage points.
This research was supported by the U.S. Social Security Administration through grant #10 − P − 98363 − 1 − 04 to the National Bureau of Economic Research as part of the SSA Retirement Research Consortium. The findings and conclusions expressed are solely those of the author(s) and do not represent the views of SSA, any agency of the Federal Government, or the NBER.