Demographics and asset returns: does the dynamics of population ageing matter?

The empirical connection between the population age-structure and financial asset returns has been so far investigated with special focus on the US, whereby weak or disparate results are obtained. This paper aims to assess whether this connection is affected by the demographic dynamics. To this end the analysis is based on a stylized overlapping generation model and on the empirical investigation for Italy, which is experiencing one of the most pronounced ageing in the world and, specifically, steeper than the US one. Following the approach used for the US, stock returns and Government bond yields are regressed over demographic and/or control variables using annual data over 1958-2004. Results for Italy are more clear-cut and thus support the importance of the country-specific age-dynamics in explaining the impact of demographics on financial markets.