Effect Of Aging Population On The Financial Markets

Abstract

The demographic questions have occupied for a few years an important place in the great debates of economic policy, in France as well as in the principal industrialized countries. In other words, all the large industrialized countries will know a considerable ageing of the population during the next decades. In the academic circles and the business press, they believe that the ageing of the population will have important effects on the financial markets following the impact awaited on the rates of saving and the request of the fund's investments. To develop the subject, we will initially present the various studies made by certain authors to justify the common claims according to which the demographic factors probably contributed to the recent movements of the values of credit, and they will have can be an important influence in the future. Then, we will continue by studying the impact of ageing on the financial markets and the economy referring to an econometric model showing the relation between the proportion of the old population of 65ans and more and certain financial variables. Therefore, how the changing volume of the segment affects the prices and the yield of the assets? Which is the impact of the population ageing on the money market? Would the development of the financial markets be largely the consequence of the population ageing?

Introduction and Literature Review

In a first part we will demonstrate how several economic models took an important place in the demographic studies and studied how the changing size of the segment affects the prices and the yield of the assets.

The three examples for such models, by chronological order, are: Yoo (1994a), Brooks (2002), and Geanakoplos, Magill and Quinzii (2004). All these models suggest that a demographic transition will affect the receipts of the capital market, although the size of the estimated values varies through the models.

Yoo (1994a) calibrates a model in which, the overlapping generations of the consumers live for 55 periods and work for 45. It finds that the increase in the rate of birth, followed by a fall, increases initially the prices of credit then decreases them. Even though this general outline is consistent with the claim which the crowd baby boom can deal with returns of the money market more reduced during their life; the effects seem to be sensitive to the fact that the capital is in a variable offer or not. With a fixed offer of durable assets, the asset's prices in "the baby boom economy" rise about 35% above their level in the normal case. This effect shrinks, an increase of 15% in the prices of Asset, when the capital is in a variable offer. In the case of variable offer of assets, the return of the capital vary 40 points of the base in a stimulation of a "baby boom" which is roughly calibrated to resemble the Case in the United States during the four last decades.

Brooks (2002) represents also the proof of stimulation in the economy of the overlapping generations. Contrary to the specification of Yoo (1994) in which the individuals live 55 years, Brooks (2002) supposes that the individuals live for four periods. He's model includes the financial asset with and without risk, which makes it possible then to explore how the demographic shocks affect the premium of the risk. The model is calibrated so that the individuals prefer the possession of less risky assets. The fast growth of the population which persists for half of a generation (two periods) and which is followed by a growth of the population lower than the average affects the level of the average return of the asset with and without risk. The average return on the risky asset changes in what's equal to the half of the return without risk, so that the average premium of risk decreases in an anticipated stage of the "baby boom", then increases when the population ages. The stimulation of Brook (2002) of a "baby stylized boom", conceived again for the reproductive history of the United States, suggests the returns without risk changes of 30 basic points like a result of the demographic change, while the prices of assets vary from less than 7% like a result of this demographic shock.

Geanakoplos, Magill and Quinzii (GMQ) (2004) develop a model of the overlapping generations even more elaborate in which, they incorporate a number of factors like the real diagrams of income by age which improve the similarity of the system to the economy of the United States after the war. Their essential conclusions suggest that the demographic shocks as the shocks tested after the war the United States could produce considerable fluctuations on the level of the values of Assets, but these real movements in the stock exchange market are two or three times more enormous than the demographic analyses can explain. A common characteristic between the models of stimulation described above is their assumption that the agents have perfect predictions in regard of the demographic shocks. This implies that when a demographic change as a fall in the rate of birth takes place, it begins immediately to affect the financial market.

In a second part, we will speak about the effect of the population ageing on the capital market and how it involves a circulation of financial flows from one country to another meaning a development of the financial markets. In fact, when the present generation of the baby boomers takes its retirement and starts to deal in the investments with an aim of financing consumption, the prices of assets will drop, simply because there would be enough "young people" who want to buy their assets. The cycle of life model, proposed by Modigliani in the Eighties as a follow of the preceding studies drawn up in the Fifties, affirms that the saving is mainly accumulated during the years of work and then liquidated gradually for the years of the pension will cause a deterioration of the prices of the financial assets when the baby boom generation takes its retirement. This interests the flows of international capital. Several researchers discussed the fact that the free mobility of the capital, joined to noncontemporary demographic diagrams through the countries, will help to reduce a fall on the price level of assets. In the developed economies, the low internal request for assets coming from the demographic trends taking place can be replaced by the external request taking place in these countries where the work age of the population is always increasing and where the savings are higher. This argument can certainly be correct when we treat with an asset