Demographic Changes and Stock Market: The OECD Experience[17-02]
Hong Sun Song, 정광수
The date
08 February 2017
How are stock prices related to demographic factors in the long run? According to the answers provided by the life cycle theory, asset prices are clearly affected by demographic structures. The higher the proportion of prime-age population becomes, the more likely asset prices are to rise, whereas the higher the proportion of retirees becomes, the more likely asset prices are to fall. Alternative theories exist in the related literature, and previous empirical findings are not quite conclusive.  
Given this situation, this paper attempts to empirically investigate this long-standing question using two sets of micro and macro data. One is the household microeconomic data used to characterize the age profiles of household stock holdings. The other is the country-level macroeconomic data used to relate demographic factors and stock prices. 
Using the micro data set, we first find that stock holdings are age-dependent and also that this pattern of dependence significantly varies depending on which assets are considered. If the scope of stocks is broadly defined to include both direct and indirect stock holding channels like private pension and mutual funds, household stock holdings show a generally hump-shaped pattern in relation to age. However, the exact shape of the hump varies with the specific type of indirect stock holdings. Furthermore, when considering only direct stock holdings, the corresponding pattern is monotone increasing with age. 
We can draw at least two important economic implications from these findings. First, the life cycle theory may or may not be empirically supported depending on the scope of stock holdings considered. The existing literature does not seem to be rigorous for this matter. Secondly, retirees seem to show an ordered-preference in liquidating stock-holdings to finance their life after retirement; that is, they begin with private pensions, then mutual funds, and then equity lastly. Such “pecking order” is deemed to be due to various factors such as mandatory distribution requirements in private pensions, tax incentives, time opportunity costs, and so forth.
A series of more serious empirical investigations were conducted using the macro data set. Can demographic changes drive long-term stock price movements? The possible link between demographic and stock-market boom-and-bust, often dubbed as the dramatic scenario called “asset market melt-down,” remains somewhat ambiguous despite many empirical and theoretical studies. We explored this link by answering the following three questions on the basis of a panel study on the 12 selected OECD countries: “Does the old population drive down stock prices indeed?” “If so, how significant is the impact?” and “Is the impact affected by international capital flows at all?” 
We note that the first two questions find mixed answers in the existing literature at least partially due to the differences in regression model specifications and data coverages. We intend to delineate convincing answers by using data for multiple developed countries and adequately handling econometric issues related to non-stationarity and panel regression.
In our empirical models, the tailwind and headwind impacts of demographic changes on stock prices are checked by way of the Middle-to-Young Ratio (MY Ratio) and the Old to Middle Ratio (OM Ratio), respectively. We find that the estimated coefficient of MY Ratio is translated to be the annual average tailwind effect of 1.17% during the sample period of 1971-2014 while that of the headwind effect was 0.74%. The overall demographic impact is estimated to be 13.4% on the basis of the contribution of these variables to R-square, and this number is somewhat larger than found in the previous studies. 
As for capital flows, we separated equity investment inflows and outflows, and consider their respective interactions with the ageing variable. It is often said that population ageing may accelerate equity capital outflows as it lowers the labor-capital ratio hence return on capital. We indeed find such negative impact of capital outflows on stock prices. On the contrary, ageing may promote equity capital inflows if an ageing economy successfully transforms itself to a more labor-saving and knowledge-intensive structure. This would mean a mitigated negative effect of ageing on stock prices, and, in fact, our results seem to provide an empirical confirmation of this relationship. To emphasize, our findings suggest that the impact of capital flows on stock prices must be assessed in connection with the characteristics of other changes that the economy is experiencing. 
In sum, while being consistent with certain previous findings, our results seem to add a few meaningful understandings to the related literature. To briefly repeat, ageing has a significant negative impact on the long-term trend of stock prices, and capital inflows [outflows] tend to mitigate [intensify] such impact.