PRELIMINARY PLEASE DO NOT QUOTE POPULATION AGING AND FINANCIAL MARKETS

A number of financial market analysts have argued that the aging of the “Baby Boom ” cohort contributed to the rise U.S. asset values during the 1990s, and that asset prices will decline when this group reaches retirement age and begins to draw down its wealth. Similar arguments can be raised for other nations that face analogous demographic transitions over the next half century. This paper explores the importance of changing demographic structure for asset returns, asset prices, and the composition of household balance sheets in the United States. The paper begins by discussing the theoretical basis for a link between asset markets and the age structure of the population. Standard models suggest that equilibrium returns on financial assets will vary in response to changes in population age structure, although the empirical magnitude of such effects is very difficult to predict with precision. While the direction of the effect of demographic changes is not controversial, the importance of such changes for financial markets is open to debate. The paper presents several strands of empirical evidence that bear on this issue. First, it reports an empirical analysis of the current age-specific patterns of asset holding in the United States, with the goal of understanding the age-wealth trajectory and how it may affect the future demand for financial assets. Data on age-wealth profiles from repeated cross-sections of the Survey o