Demographics and US Stock Market Fluctuations<xref ref-type="fn" rid="FN8">*

This article illustrates how the information component determining long-horizon US stock market returns can be related to a demographic variable, MY the ratio of middle-aged to young adults. In fact, MY can be seen as the major determinants of a slowly evolving time-varying mean of the dividend/price ratio. A forecasting model for stock market returns over a century of US annual data that uses as predictors the dividend/price ratio and MY overcomes all the statistical difficulties related to the high persistence of the dividend/price ratio and performs very well in forecasting long-horizon stock market returns. Moreover, the use of demographic variables as a predictor for long-run stock market returns delivers a steeply downward sloping term structure of stock market risk. (JEL codes: G17, C53, E44) Copyright The Author 2010. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.