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The Equity Premium and the Baby Boom

Robin Brooks

No 155, Econometric Society 2004 North American Winter Meetings from Econometric Society

Abstract: This paper explores the quantitative impact of the Baby Boom on stock and bond returns. It constructs a neoclassical growth model with overlapping generations, in which agents make a portfolio decision over risky capital and safe bonds in zero net supply. The model has exogenous technology and population shocks that are calibrated to match long run data for the US. With agents allowed to borrow freely by shorting bonds, the model fails to match the historical equity premium by a large margin and generates only small asset market effects over a simulated Baby Boom. When agents are constrained in their ability to borrow, the model comes close to matching the historical equity premium and suggests that there will be a sharp rise in the equity premium when the Baby Boomers retire, driven by a large decline in bond returns as Baby Boomers seek to hold the riskless asset in retirement

Keywords: Equity premium; population aging; portfolio choice (search for similar items in EconPapers)
JEL-codes: E27 G11 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-dge
Date: 2004-08-11
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