Demographics , Stock Market Flows , and Stock Returns ∗

This paper studies the link between population age structure, net outflows (dividends plus repurchases less net issues) from the stock market, and stock market returns in an overlapping generations framework. I find support for the traditional lifecycle models — the outflows from the stock market are positively correlated with the changes in the fraction of old people (65 and over) and negatively correlated with the changes in the fraction of middle-aged people (45 to 64). Changes in population age structure also add significant explanatory power to equity premium regressions. The population structure adds to the predictive power of regressions involving the investment/savings rate for the U.S. economy. Finally, international demographic changes have some power in explaining international capital flows. This paper is a revised version of the second chapter of my dissertation at the Anderson School of Management at UCLA. I thank Matthias Kahl, Jonathan Karpoff (the editor), Richard Roll, Ivo Welch, and an anonymous referee for feedback, support, and encouragement. Antonio Bernardo, Tyrone Callahan, Bhagwan Chowdhry, Mark Grinblatt, Jan Jindra, Robert Michaud, Pedro Santa-Clara, Avanidhar Subrahmanyam, Walter Torous, and seminar participants at the 2001 WFA conference also gave helpful suggestions. I also thank Marty Auvil for help with editing the manuscript. I retain the credit for any remaining errors. Mailto: amit [email protected]. U.S. mail address: Goizueta Business School, 1300 Clifton Road, Atlanta, GA 30322, Tel: (404)727-4825. Demographics, Stock Market Flows, and Stock Returns