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  3. American Economic Review
  4. December 2007
  5. Demographics and Industry Returns

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Demographics and Industry Returns

  • Stefano DellaVigna
  • Joshua M. Pollet
American Economic Review
vol. 97, no. 5, December 2007
(pp. 1667–1702)
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Abstract

How do investors respond to predictable shifts in profitability? We consider how demographic shifts affect profits and returns across industries. Cohort size fluctuations produce forecastable demand changes for age-sensitive sectors, such as toys, bicycles, beer, life insurance, and nursing homes. These demand changes are predictable once a specific cohort is born. We use lagged consumption and demographic data to forecast future consumption demand growth induced by changes in age structure. We find that demand forecasts predict profitability by industry. Moreover, forecast demand changes five to ten years in the future predict annual industry stock returns. One additional percentage point of annualized demand growth due to demographics predicts a 5 to 10 percentage point increase in annual abnormal industry stock returns. However, forecasted demand changes over shorter horizons do not predict stock returns. A trading strategy exploiting demographic information earns an annualized risk-adjusted return of approximately 6 percent. We present a model of inattention to information about the distant future that is consistent with the findings. We also discuss alternative explanations, including omitted risk-based factors. (JEL E21, G12, G32, J11, L11, L25)

Citation

DellaVigna, Stefano, and Joshua M. Pollet. 2007. "Demographics and Industry Returns." American Economic Review, 97 (5): 1667–1702. DOI: 10.1257/aer.97.5.1667

Additional Materials

JEL Classification

  • E21 Macroeconomics: Consumption; Saving; Wealth
  • G12 Asset Pricing; Trading volume; Bond Interest Rates
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
  • J11 Demographic Trends and Forecasts; General Migration
  • L11 Production, Pricing, and Market Structure; Size Distribution of Firms
  • L25 Firm Performance: Size, Diversification, and Scope