Demographic transition and asset prices: Evidence from developing countries

Abstract

This paper examines the effects of demography on asset prices in developing countries, which has remained largely an unexplored area. Using panel data estimators for 25 countries, we find evidence of significant positive impact of working age population on real housing and stock prices, buttressing the intuition of the life cycle theory. Contrary to the evidence for advanced countries, we do not find support for negative housing wealth effect of ageing due to factors such as lack of state-funded health and old age safety nets, reliance on family for social insurance, and strong bequeath motives rooted in the social configuration. Results also suggest that as developing countries attain a peak workforce participation rate over the next two decades, real stock and housing prices would cumulatively increase 4–7 percentage points, with concomitant implications for domestic savings, consumption, aggregate demand and, thus, for the conduct of macroeconomic policies in developing countries.