The co-called baby-boom phenomenon in the US has inspired
a lot of research on effects of this generation on the economy. In particular,
90s and 2000s is the period when this generation will reach retirement.

Therefore it is especially interesting to know what implications may be on
welfare, labor market and stock markets. Yoo (1994) shows that demographic
factors significantly influences the economy, in particularly savings,
especially at low frequencies.

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Bakshi and Chen (1994) in their influential study argue
that if demography can influence certain macroeconomic parameters, then it is
essential to understand how changes in age structure of a population can affect
the stock market. The authors attempted to address two hypotheses – life-cycle
investment hypothesis and life-cycle risk-aversion hypothesis. In the
life-cycle investment hypothesis Bakshi and Chen (1994) address the composition
of savings of an investor. Essentially they investigate the changing preference
of investment into stock market or housing, which changes through aging of the
economic agent. The authors argue, that in younger age people tend to have high
housing demands, thus in this age people tend to invest less into stock market.

However by getting older, people solve their housing problems and start to
invest into the stock market to help finance their retirement. Moreover Bakshi
and Chen (1994) propose that the older people get the more risk-averse they
become. Hence the increase in equity risk premiums can be correlated with an
aging population, according to Bakshi and Chen (1994). As a proxy for age
composition they use an average age of a population, S&P 500 index – stock
market and residential investment deflator over GNP deflator – proxy for
housing market. Bakshi and Chen (1994) found strong support for their savings
hypothesis, especially in the period post 1945. As for life-cycle risk
aversion, they identified average age as a significant predictor of equity
premiums from 1990 – 1990, in contrast to dividend yield and consumption
growth. Bergantino (1998) used a slightly different approach. He looked at age
distribution of a population and how people at different stages of their
life-cycle interact with the financial markets.

An obvious question is, what will happen to the financial
markets, when the baby boomers generation will no longer be an active player in
an economy. Brooks (2000), states that there are two views on this: either the
baby-boomers will sell of their assets to the new generation, which will eventually
drive the prices down or the information of the future retirement of the baby
boomers is already incorporated in the price and therefore no significant
effect will be noticed. Brooks (2000) concluded that despite the markets are
forward looking and investors are rational, aging of a population has a
significant effect on the financial markets, which implies that governments
have to develop policies to smooth out the effects of transitions of
generations

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