[Skip to content]

Sign up for our daily newsletter
The Actuary The magazine of the Institute & Faculty of Actuaries

Demographic trends could help predict stock and bond yields

Investors can use demographic trends to predict stock and bond market yields, a study by Copenhagen Business School and Warwick Business School has suggested.

Demographics could predict yields ©Shutterstock
Demographics could predict yields ©Shutterstock

The researchers found that yields from both markets followed similar boom-and-bust cycles as the US population, reflecting the number of young borrows and middle-aged savers.

After analysing 100 years of data, they found that stock and bond prices were lower when there were more young workers who tended to spend more, leading to greater yields.

When there were more middle-aged workers looking to invest and save, greater demand drove up stock and bond prices, which resulted in lower yields.

The findings suggest that the widespread practice of splitting portfolios across stocks and bonds may not provide the level of protection expected as both rely on the same population trends.

They may also encourage investors to spread their funds across a more diverse portfolio, including international markets, to maximise their returns.

Dr Arie Gozluklu, associate professor of finance at Warwick Business School, said: "Many wealth managers invest a portion of their fund in stocks and some in bonds.

“But the common demographic trends can reduce the benefits of such diversification, especially in countries where financial markets play an important role to smooth consumption over time.

“Clearly this cannot explain all movement in the financial markets, especially in the event of crashes, but the effect of the population structure is too important to be dismissed.”

The findings were published in the paper Stock vs bond yields and demographic fluctuations in the Journal of Banking and Finance.

The researchers used data from a large cross-section of countries, finding that the population trends and corresponding rise and falls in the markets were particularly striking since the end of WWII.

As different countries have varied population cycles, and their markets follow different trends, wealth managers could potentially use demographic data from around the globe to help them decide where to invest.

Dr Gozluklu said: “Many investors tend not to look beyond their native markets. There may be many reasons for this home bias, such as information or language barriers to investing overseas.

“However, these demographic trends show that investors should consider international markets to maximise their returns, especially if they come from countries with small markets.

“That way, they can invest in the market at a favourable point in that nation’s demographic cycle, instead of being constrained by the prevailing pattern in their home country.”

Sign up to our free newsletter here and receive a weekly roundup of news concerning the actuarial profession