Demographics and Asset Prices Carlo A.Favero, A.Gozluklu, A.Tamoni February 10, 2010 Contents 1 Context and Rationale for the Proposed Research 1 2 Research Agenda 6 2.1 The role of demographic variables in the dynamic dividend growth model. ................................ 6 2.2 Demographics and the term structure of stock market risk .... 6 2.3 The International Evidence ..................... 8 2.4 Demographics and the long-run behaviour of bond and stocks . . 8 3 Resources 9 1 Context and Rationale for the Proposed Re- search The objective of our research proposal is to assess the role of demographic trends as a pricing factor for the stock market. Most of the available evidence on stock market returns predictability can be framed within the dynamic dividend growth model proposed by Campbell and Shiller (1988). This model uses a loglinear approximation to the denition of returns on the stock market. Under the assumption of stationarity of the log of price-dividend ratio, total stock market returns, r s t+1 ; can be approximated by the relation derived by linearizing ln  1+ e pt+1dt+1  around its steady state value P=D : r s t+1 =d t+1 + k    dp t+1  dp  +  dp t  dp  where  = P=D 1+P=D ; dp = ln (D=P ) :By iterating (??) forward for m periods, and taking expectations, we have: E t m X j=1  j1  r s t+j  = dp t  dp + E t m X j=1  j1 (d t+j )+  m E t  dp t+m+1  dp  (1) 1