Asset Pricing Implications of Demographic Change

Abstract

An overlapping generations model featuring stochastic birth and death rates is solved in general equilibrium. I provide su¢ cient conditions for the interest rate to be decreasing in the birth rate and increasing in the death rate. If preferences are recursive, demographic uncertainty is priced in …nancial markets, and the equity premium is higher during periods characterized by a high birth rate and low mortality than in times of a low birth and high death rate. Demographic changes explain substantial parts of the time variation in the real interest rate, equity premium and conditional stock price volatility.