Effect of Aging Population on the Financial Markets

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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...
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