Can demographic structures help predict equity premiums?: Evidence from a panel with cross-section dependence

ABSTRACT

This paper re-examines the link between equity risk premiums and demographic changes using panel data of 17 advanced countries over the postwar period. Based on the method of Pesaran (2006) that takes into account cross-section dependence, we find little evidence that demographic structures predict excess stock returns. However, demographic variables appear to have strong predictability of the excess returns in pooled OLS regressions. These results suggest that the failure of controlling for the influence of the common factors would lead to spurious estimation results.

KEYWORDS:

• Demographic structures
• equity premium
• cross-section dependence
• spurious estimates

JEL CLASSIFICATION:

• G12
• J11
• C23.

Acknowledgments

We would like to thank an anonymous referee for valuable comments that help to improve our paper. All remaining errors are ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ See, for example, Bakshi and Chen (1994), Poterba (2001), Geanakoplos, Magill, and Magill (2004), Goyal (2004), Jamal and Quayes (2004), and Bae (2010).

² Jorda et al. (2019)’s dataset can be downloaded from http://www.macrohistory.net/data/. The UN population dataset is from World Population Prospects 2019 (Online Edition. Rev. 1) and can be accessed at https://population.un.org/wpp/Download/Standard/Population/.

³ We do not present the results here for the sake of saving the space. But the results are available upon request.