Doctoral thesis

A Study of Asset Pricing in an Ageing Population

When the Representative Agent Ages, Risk Attitude of an Aging Population - a Case of Japan: Demographic distribution influences asset pricing through shifting the agent’s risk at ...

Author(s) :

Yasusori Iwanaga, PhD

Chief Investment Officer at AMUNDI (Japan)

Abstract :

When the Representative Agent Ages, Risk Attitude of an Aging Population - a Case of Japan: Demographic distribution influences asset pricing through shifting the agent’s risk attitude. I develop a simple preference model, "ageing agent utility", with a linear risk aversion function of age distribution in a time-separable utility. Two descriptors incorporate the dynamics of demography: the fraction of the working-age population (age group from 15 to 64 years old) and that of the elder population (age group of 65 and above). This empirical study on Japan finds that the growth of the working-age group’s share drives the representative agent's implied risk aversion and helps to explain time-varying equity risk premium. The ageing agent model demonstrates the relevance of demographic transitions to asset pricing by satisfying the Hansen-Jagannathan bound with a higher covariance with the stock market return. 

Ageing, Income Volatility, and Asset Pricing in Japan: Ageing is advancing at the fastest pace in Japan affecting economic activity and market’s risk appetite over years. This paper looks into Japanese population and equity market in the post-WWII period. It develops models to assess the agent’s risk attitude and examine the relevance of labor income uncertainty and demographic transitions on asset pricing. For risk preference, the power and “ageing agent” utility functions adapt to an incomplete market with unhedgeable income risk by the consumption volatility model, CVM. The power utility CVM indicates a sign of precautionary saving with a greater risk aversion level than one in the complete market. The ageing agent utility CVM demonstrates consistent ageing effect by a similar path of time-varying risk aversion to one without income risk. Declining share of the working age groups leads to the higher risk aversion whereas no explicit sign of precautionary saving. For the influence on asset pricing, the evaluation of the stochastic discount factors shows distinct effects. Income uncertainty dampens the SDF’s sensitivity to equity market regardless of considering ageing effect. Ageing effect, on the other hand, increases the relevance to stock market returns in the complete market while decreases when income uncertainty exists. The research will shed light on the impact of the macroeconomic factors despite its limitation of being a representative agent based on a partial equilibrium approach.

Date : 25/07/2016
Thesis Committee :

Supervisor: Giuseppe Bertola, EDHEC Business School

External reviewer: Patrice Poncet, ESSEC

Other committee member: Abraham Lioui, EDHEC Business School

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