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Demographics, Longevity and Financial Markets

Demographics and Financial Markets
Lecture Notes 1

Demographics and Stock Market Returns

Lecture Notes 2

Demographics and the Behavior of Interest Rates

Lecture Notes 3

Longevity risk: measurement, importance, consequences

Lecture Notes 4


References Books

Campbell, J. Y.; A. W. Lo; and C. MacKinlay. "The Econometrics of Financial Markets." Princeton University Press, Princeton, NJ (1997).

Cochrane, J. H. "Asset Pricing." Princeton University Press, Princeton, NJ (2005).

Kotlikoff L.J. (1993), Generational Accounting, The Free Press, New York

Kotlikoff L.J. and Burns S. (2004), The Coming Generational Storm, MIT Press

Siegel Jeremy.J.(1998), Stocks For the Long-Run, 2nd edition, McGraw-Hill

Shiller, Robert J., 2005, Irrational Exuberance, second edition, Princeton University Press.

Taleb, N.N., 2001, Fooled By Randomness. The Hidden Role of Chance in the Markets and in Life, TEXERE XLC


Lecture 1

Bakshi, G. S., and Z. Chen."Baby Boom, Population Aging, and Capital Markets." Journal of Business, 67 (1994), 2, 165-202.

Geanakoplos, J.; M. Magill; and M. Quinzii. "Demography and the Long Run Behavior of the Stock Market." Brookings Papers on Economic Activities, 1(2004), 241-325.

Lecture 2

Abel, A. B."The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security." Econometrica, 71 (2003), 2, 551-578.

Abel, A. B. "Will Bequests Attenuate the Predicted Meltdown in Stock Prices When Baby Boomers Retire?" Review of Economics and Statistics, 83 (2001), 4, 589-595.

Ang, A. and G. Bekaert. "Stock Return Predictability: Is It There?" The Review of Financial Studies, 20 (2007), 651--707.

Ang, A. and A. Maddaloni."Do Demographic Changes Affect Risk Premiums? Evidence from International Data." Journal of Business, 78 (2005), 341-380.

Bloom, D. E.; D. Canning; and J. Sevilla."The Demographic Dividend. A new Perspective on the Economic Consequences of Population Change." Rand Corporation, Santa Monica (2003).

Boudoukh, J.; M. Richardson; and F. R.Whitelaw. "The Myth of Long-Horizon Predictability." The Review of Financial Studies, 21 (2008), 4, 1577-1605.

Boudoukh, J.; R. Michaely; M. Richardson; and M. Roberts. "On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing." Journal of Finance, (2007), 877-915.

Campbell, J. Y. "A Variance Decomposition for Stock Returns." Economic Journal, 101 (1991), 157--179.

Campbell, J. Y., and S. B. Thomson. "Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?" The Review of Financial Studies, 21(2008), 1509-1531.

Campbell, J. Y., and R. Shiller. "Stock Prices,Earnings, and Expected Dividends." Journal of Finance, 43 (1988), 661-676.

Cochrane, J. H. "The Dog that Did Not Bark: A Defense of Return Predictability." Review of Financial Studies, 21 (2008), 4, 1533-1575.

Dalla Vigna S., and J.Pollet. "Demographics and Industry Returns." American Economic Review, 97(2007), 1167-1702.

Davidson, R., and E. Flachaire. "The Wild bootstrap, Tamed at Last.", Journal of Econometrics,146(2008), 1, 162-169.

Erb, C. B.; C. R. Harvey, and T. E. Viskanta. "Demographics and International Investment." Financial Analysts Journal, 53 (1996), 4,14-28.

Fama, E., and K. R. French. "Dividend Yields and Expected Stock Returns." Journal of Financial Economics, 22 (1988), 3-26.

Favero, C.A., Gozluklu, A. E. and A.Tamoni. 2011. Demographic Trends, the Dividend-Price Ratio and the Predictability of Long-run Stock Market Returns, forthcoming in Journal of Financial and Quantitative Analysis.

Goyal, A., and I. Welch. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction." The Review of Financial Studies, 21(2008),4, 1455-1508.

Goyal, A., and I. Welch. "Predicting the Equity Premium with Dividend Ratios." Management Science, 49(2003), 5, 639--654.

Goyal, A. "Demographics, Stock Market Flows, and Stock Returns." Journal of Financial and Quantitative Analysis, 39 (2004), 1, 115-142.

Lander, J.; A. Orphanides; and M. Douvogiannis. "Earnings Forecasts and the Predictability of Stock Returns: Evidence from trading the S&P." Journal of Portfolio Management, 23(1997), 4, 24-35.

Lettau, M., and S. Ludvigson. "Expected Returns and Expected Dividend Growth.", Journal of Financial Economics, 76 (2005), 583-626.

Lettau, M., and S. Ludvigson. "Consumption, Aggregate Wealth and Expected Stock Returns." Journal of Finance, 56 (2001), 3, 815-849.

Lettau, M., and S. Van Nieuwerburgh. "Reconciling the Return Predictability Evidence." The Review of Financial Studies, 21 (2008), 4, 1607-1652.

Lewellen, J. "Predicting Returns with Financial Ratios." Journal of Financial Economics, 74 (2004), 209--35.

Nelson, C. C. and M. J. Kim. "Predictable Stock Returns: The Role of Small Sample Bias." Journal of Finance, 43 (1993), 641--661.

Neely C.J., and P.A. Weller. "Predictability in International Asset Returns: A Reexamination." Journal of Financial and Quantitative Analysis, 35 (2000), 601-620.

Paye, B.S., and A. Timmermann. "Instability of Return Prediction Models." Journal of Empirical Finance, 13 (2006), 274-315

Poterba, J. M. "Demographic Structure and Asset Returns." The Review of Economics and Statistics, 83 (2001), 4, 565-584.

Rapach D.E., and M.E.Wohar. "In-Sample vs. Out-of-Sample Tests of Stock Return Predictability in the Context of Data-Mining." Journal of Empirical Finance, 13 (2006), 231-247.

Shiller, R. J. "Irrational Exuberance" Princeton University Press (2005).

Stambaugh, R. F. "Predictive Regressions." Journal of Financial Economics, 54 (1999), 375--421.

Valkanov, R. "Long-Horizon Regressions: Theoretical Results and Applications." Journal of Financial Economics, 68 (2003), 201--232. 33

Demographics and the Term Structure of Stock Market Risk

Van Binsbergen J.H. and R.S.Koijen, 2009, Predictive Regression: a Present Value Approach, mimeo

Campbell, J. Y., 1991. A variance decomposition for stock returns. Economic Journal 101, 157--179.

Campbell, John Y., and Luis M. Viceira, 2002, Strategic Asset Allocation: Portfolio Choice for Long-Term Investors (Oxford University Press).

Campbell, John Y., and Luis M. Viceira, 2005, The Term Structure of the Risk-Return Tradeoff, Financial Analyst Journal, 61, 1, 34-44

Cochrane, John H., 2008, The Dog that Did Not Bark: A Defense of Return Predictability, Review of Financial Studies, 20, 5.

Cochrane J.H., 2008, State-Space versus VAR models of Stock Returns, mimeo

Favero C.A. and A.Tamoni. "Demographics and the Term Structure of Stock Market Risk", available at http:www.igier.unibocconi.itfavero, (2010).

Lacerda, F., and Santa-Clara, P. 2010, Forecasting Dividend Growth to Better Predict Returns, Discussion paper.

Pastor, Lubos, and Robert F. Stambaugh, 2008, Predictive systems: Living with imperfect predictors, Journal of Finance

Pastor, Lubos and Robert F. Stambaugh, 2009, Are Stocks Really Less Volatile in the Long Run?,Working Paper 14757,

Paye, B.S., Timmermann A.(2006), Instability of return prediction models. Journal oF Empirical Finance, 13, 274-315

Pesaran M.H., A.Pick, and A.G.Timmermann(2010), Variable Selection Estimation and Inference for Multi-period forecasting problems, CEPR working paper 7139

Robertson D. and S.Wright, 2009, The Limits to Stock Return Predictability, mimeo

Siegel Jeremy.J.(1998), Stocks For the Long-Run, 2nd edition, McGraw-Hill

Shiller, Robert J., 2005, Irrational Exuberance, second edition, Princeton University Press.

Schotman, Peter C., Rolf Tschernig, and Jan Budek, Long Memory and the Term Structure of Risk, Journal of Financial Econometrics, Fall 2008, 6 (4), 459495.

Stambaugh, R. F., 1999. Predictive regressions. Journal of Financial Economics 54, 375--421.

Lecture 3

Ang, A., and G. Bekaert. 2002. Regime Switches in Interest Rates. Journal of Business and Economic Statistics 20:163--182.

Ang, A. and M. Piazzesi. 2003. A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables. Journal of Monetary Economics 50(4):745-787.

Ang, A., Dong, S., and M. Piazzesi. 2005. No-Arbitrage Taylor Rules, NBER Working Paper No. 13448.

Balduzzi, P., S. R. Das, and S. Foresi. 1998. The Central Tendency: A Second Factor in Bond Yields. Review of Economics and Statistics 80:62--72.

Bekaert, G., S. Cho, and A. Moreno. 2003. New-Keynesian Macroeconomics and the Term Structure. Working Paper, Columbia University.

Bekaert, G. and E. Engstrom. 2010. Inflation and the Stock Market: Understanding the 'Fed Model'. Journal of Monetary Economics 57:278-294.

Campbell J.Y. and R.J. Shiller. 1991. Yield Spreads and Interest Rate Movements: A Bird's Eye View. The Review of Economic Studies 58(3):495-514.

Campbell, J. Y., and T. Vuolteenaho. 2004. Inflation Illusion and Stock Prices. American Economic Review 94(2):19-23.

Chen, R. R. and L. Scott. 1993. Maximum Likelihood Estimation for a Multi-factor Equilibrium Model of the Term Structure of Interest Rates, Journal of Fixed Income 3(3):14-31.

Clarida, R., J. Galì, and M. Gertler. 2000. Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory. The Quarterly Journal of Economics 115(1):147-180

Cochrane, J. H., and M. Piazzesi. 2005. Bond Risk Premiums, American Economic Review 95:138--160.

Duffee, G. R. 2002. Term Premia and Interest Rate Forecasts in Affine Models. Journal of Finance 57: 405-43.

Dewachter, H., and M. Lyrio. 2006. Macro Factors and the Term Structure of Interest Rates. Journal of Money, Credit and Banking 38:119-140.

Diebold, F.X., G.D. Rudebusch, and S. B. Aruoba. 2006. The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach. Journal of Econometrics 131:309-338.

Duffee, G. R.. 2002. Term Premia and Interest Rate Forecasts in Affine Models. Journal of Finance 57(1):405-43.

Duffie, D. and R. Kan. 1996. A Yield-Factor Model of Interest Rates. Mathematical Finance 6:379-406.

Fama, E. F.. 2006. The Behavior of Interest Rates. The Review of Financial Studies 19(2):359-379.

Fama, E. F., and R. R. Bliss. 1987. The Information in Long-Maturity Forward Rates. American Economic Review 77:680--692.

Favero, C. A., Niu, L. and Sala, L. 2011. Term structure forecasting: no-arbitrage restrictions versus large information set. Journal of Forecasting. doi: 10.1002/for.1181

Gallmeyer, Michael F., Burton Hollifield, and Stanley E. Zin. 2005. Taylor Rules, McCallum Rules, and the Term Structure of Interest rates, NBER Working Paper 11276.

Gray, S. F.. 1996. Modeling the Conditional Distribution of Interest Rates as a Regime-Switching Process. Journal of Financial Economics 42:26--62.

Hamilton, J. D.. 1988. Rational-Expectations Econometric Analysis of Changes in Regime: An Investigation of the Term Structure of Interest Rates. Journal of Economic Dynamics and Control 12:385--423.

Hordahl, P., O. Tristani, and D. Vestin. 2006. A Joint Econometric Model of Macroeconomic and Term Structure Dynamics. Journal of Econometrics 131:405-444.

Kozicki, S. and Tinsley, P.A.. 2001. Shifting Endpoints in the Term Structure of Interest Rates. Journal of Monetary Economics 47:613-652.

Lindh T. and B. Mahlberg. 2000. Can Age Structure Forecast Inflation Trends. Journal of Economics and Business 52:31-49.

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Malmendier, U., and Nagel S.(2011) Learning from Inflation Experiences,

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Rudebusch, G.. 2002. Term Structure Evidence on Interest-Rate Smoothing and Monetary Policy Inertia. Journal of Monetary Economics 49:1161--1187

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Lecture 4

Auerbach A.J., Kotlikoff L.J. and Leibfritz W.(1999), Generational Accounting Around the World, The University of Chicago Press

Bisetti E. Nocera G. and Tebaldi C. (2012), The Impact of Longevity Risk on the Term Structure of the Risk-Return Tradeoff, Bocconi University, CAREFIN Working Paper.

Blake D. Boardman T. and A. J. Cairns (2010), Sharing Longevity Risk: Why Governments Should Issue Longevity Bonds, Pension Institute Discussion Paper.

Cairns A. J. G. Blake D. and Dowd K., A Two Factor Model for Stochastic Mortality with Parameter Uncertainty, Journal of Risk and Insurance, 2006.

Cairns A. J. G. Blake D. and K. Dowd (2008), Mortality Density Forecasts: An Analysis of Six Stochastic Mortality Models, Pension Institute Discussion Paper

Cairns A. J. G. Blake D. Dowd K.(2007), A quantitative comparison of stochastic mortality models using data from England and Wales and the United States, Pension Institute Discussion Paper

Canudas-Romo V.(2008), The Modal Age at Death and the Shifting Mortality Hypothesis, Demographic Research 19(30): 1179-1204

Canudas-Romo V. and Engelman M.(2009), Maximum life expectancies: Revisiting the best practice trends, Genus 65(1): 59-79.

Continuous Mortality Investigations, (2009) A prototype mortality projections model: Part one - an outline of the proposed approach, CMI Website, Working Paper 38.

Continuous Mortality Investigations (2009), A prototype mortality projections model: Part two - a detailed analysis, CMI Website,Working Paper 39 .

Continuous Mortality Investigations (2010), The CMI mortality projections model: CMI 2010, CMI Website, Working Paper 49.

Girosi F. and King G.(2007), Understanding the Lee-Carter mortality forecasting method,Working paper,

JP Morgan Pension Advisory Group(2007), Lifemetrics: A toolkit for measuring and managing longevity and mortality risks, Technical Document - Version 1.1.

Gomes F.J., Kotlikoff L.J. and Viceira L.M. (2011), The Excess Burden of Government Indecision, NBER Chapters, in: Tax Policy and the Economy, Volume 26 National Bureau of Economic Research, Inc

Lee R. D. and Carter R. L.(1992), Modeling and Forecasting U.S. Mortality, Journal of the American Statistical Association

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Oullette N. (2011), Smoothing mortality data and summarizing recent trends at older ages in low mortality countries, Presented at the Institut Louis Bachelier Conference: Longevity Modeling an Interdisciplinary Approach.

Oullette N. (2009), Changes in age-at-death distribution in low mortality countries: a nonparametric approach, Presented at the XXVI International Population Conference of the International for the Scientific Study of Population.

Renshaw A. E. and Haberman S.(2006), A cohort based extension to the Lee-Carter model for mortality reduction factors, Insurance: Mathematics and Economics.

Robine J. Michel J.P. and Institut S. (2008), Has there been a compression of morbidity in countries with low mortality?, Prevention of Functional Dependency :139-148

Sartor N. (1999), Generational Accounts for Italy, Ch 13 in Auerbach A.J., L.J.Kotlikoff and W.Leibfritz, Generational Accounting Around the World, The University of Chicago Press, 299-323

Vallin J. and Mesle F.(2010), Will life expectancy increase indefinitely by three months every year?, Population and Societies

Visco I (2009) "Retirement Saving and the Payout phase: How to Get There and How to Get the Most Out of It", OECD Journal Financial Market Trends, 1, 143-160

Visco I.(2006) "Longevity Risk and Financial Markets", inBalling, Gnan and Lieman eds. "Money,Finance and Demography: The Consequences of Ageing", Suerf Colloquium Volume, 9-30

Hedging Longevity Risk

Brooks, R. J. "Asset-Market Effects of the Baby Boom and Social-Security Reform." American Economic Review, 92 (2002), 2, 402-406.

IMF(2012) "The Financial Impact of Longevity Risk", Ch.4 in IMF Global Financial Stability Report, April, 1-31

Last update 26/06/2012

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