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Demographic Change and Asset Prices



Demographic Change and Asset Prices 235Demographic Change and Asset Prices Demographic Change and Asset Prices Robin Brooks1 Abstract Will the ageing of the baby boomers lead to a fi nancial market meltdown? Will population ageing raise the equity premium, as ageing households become less willing to bear risk? This paper investigates these questions, using a new dataset that covers stock and bond prices, as well as age distributions, for a large cross-section of developed countries from the early 1900s. It uses an econometric specifi cation that links real stock and bond prices, real returns and the equity premium to the relative importance of all age groups in the age distribution. It fi nds little evidence to suggest that asset prices will suffer abrupt declines when the baby boomers retire. In fact, in countries where stock market participation is greatest, including Australia, Canada, New Zealand, the United Kingdom and the United States, evidence suggests that real fi nancial asset prices may continue to rise as populations age, consistent with survey evidence that households continue to accumulate fi nancial wealth well into old age and do little to run down their savings in retirement. 1. Introduction When it comes to predicting the effects of population ageing on fi nancial markets, there are two camps: those who believe in the doomsday scenario – the market meltdown – and those who do not. The meltdown scenario holds that retiring baby boomers will be selling their assets to a smaller generation of young investors. This will drive asset prices down, leaving many baby boomers with a smaller nest- egg than anticipated. The opposing view maintains that forward-looking fi nancial markets are pricing assets to refl ect the highly predictable ageing of the baby boomer generation. As a result, there cannot be a market meltdown when the baby boomers retire, because it has already been priced in. The ageing of the baby boomers and speculation over the p

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