Proceedings of 3rd Global Business and Finance Research Conference

Proceedings of 3rd Global Business and Finance Research Conference

9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan , ISBN: 978-1-922069-61-0

The Effect of Demographic Transition to Capital Market

Ming-Chang Cheng*, Chien-Chi Lee**, Hui-Chuan Wang*** and Tien-Chun Kuo****

Nowadays, many countries include advanced countries, transition economies and emerging market economies face serious population aging. Because of baby boomers’ aging and retirement, late marriage and the birth rate declination cause the population aging , more and more researches begin to analyst whether is aging problem will affect a country’s economy and financial system or not.

The research chooses saving rate, investment rate and the current account to GDP to be the macroeconomic variables, and chooses stock return, bond return, stock market capitalization to GDP and bond market capitalization to GDP be the financial variables. Our empirical work based on experience of

73 countries, we separate them into three parts by income and study how they was affected by aging problem. According to our empirical study, we find that population aging decreases saving rate, investment rate and current account to GDP, on the other hand, the effect of population aging on financial markets show somewhat mixed results. The regression analysis demonstrates that the proportion of elderly population do not seem to be correlated with the asset’s return but is positively correlated with the size of the bond market, and the proportion of elderly is inversely correlated with the size of the stock market. There are different effects to countries which from different income level.

Key words: Population Aging, Macro Economy, Financial Market, Panel Data

1. Introduction

For the past few years, the population aging has been challenged attention by people. There are many countries are experiencing a continuous rise in the size of the elderly population such as developing countries and developed countries. According to the United Nations, in 2000, there was

600 million elderly population in the world, the elderly population of the total population of 10 %, the number of the elderly population was estimated to be 2 billion in 2050, the elderly population of the total population of 5 %, it is clearly that the population aging has been a serious problem for the world.

_______________________________________________________________________

* Ming-Chang Cheng, Associate Professor, Department of Business Administration, National Chung Cheng

University,Taiwan. Email: bmamcc@ccu.edu.tw

** Chien-Chi Lee, Ph.D. student, Department of Business Administration, National Chung Cheng University,Taiwan;

Lecturer,Department of Hospitality Management, Taiwan Shoufu University.

*** Hui-Chuan Wang, Lecturer, Department of International Trade and Business, Hsing Wu Institute of Technology,

Taiwan.

****Tien-Chun Kuo, Graduate student, Department of Business Administration, National Chung Cheng

University,Taiwan

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Based on the latest information retrieved from the Department of Manpower Planning, the

Council for Economic Planning and Development (Taiwan, ROC), the Population Projections for

R.O.C. (Taiwan): 2012-2060 indicated that the proportion of population ages 80 and above to population ages 65 and above will increase from 25.1% in 2011 to 41.4% in 2060, the dependency ratio

1

will increase from 35 people in 2010 to 97 people in 2060, which implies that not only other countries but also Taiwan faced the population aging. James M. Poterba(2004) founded that the proportion of population aged 65 and above to the population aged 20 and above will increase from

17 % in 2000 to 27 % in 2030. Based on the above mentioned, how to solve the population aging is a import issue for most countries.

For the past few years, many countries at the stage of baby boomers’ aging and retirement, the aging of population is bound to be of great effects to the economic performance of those countries. There are many researches have something to do with demographic transition, Deakeun

Park(2005) indicated the correlation between demographic transition and macro economy, this research derived the regression results from the panel data of APEC and founded that the ratio of old dependency has shown to negative correlated with the saving rate, the investment rate and the current account balance to GDP.

The result supported the lifecycle income theory of consumption

2 and illustrated that as the increasing of the old dependency ratio, the saving rate and the investment rate decreased, the aging has significant negative correlated with the current account/GDP ratio because the decline in the saving rate caused by aging is greater than the decline in the investment. Zhong(2008) derived the regression results from the panel data of OECD countries and Taiwan to discuss the effect of demographic transition on macro economy and financial market. The result reveals that the ratio of dependency old has negative correlated with the saving rate and the investment rate, the decline in the saving rate caused by aging is greater than the decline in the investment, meanwhile the GDP per capita has no significant effect on the saving, because for the rising of the income, the consumption and the saving increased simultaneously. As for the increasing of the ratio of dependency old, it would be lower the investment rate, as the supply of labor and the average labor productivity decrease due to population aging and the economic situation becomes pessimistic, with the subsequent contraction in investment. Declining investment in turn implies a decrease in the supply of financial assets to the financial investment.

1

Dependency ratio = (number of people aged 0-14 and those aged 65 and over/number of people aged 15-64)*100

2

Modigliani and Brumberg(1954) indicated that people will take their lifetime income into consideration when deciding their consumption level. An average consumer has a lifetime income pattern of a very low level of income prior to employment, a rise in income level during adult years due to earnings from employment, and a lower level of income in late life when earnings decline after retirement.

1



2. Literature Review

2.1 The effect of aging of population on macro economy

E Philip Davis(2006) used the panel data involved 72 countries from 1960-2002, of which 23 are OECD countries, 36 are EMEs and 13 are transition economies to discuss the aging of the world population with major economic implications and capital market. In the process of the aging population, offshore migration of intensive labor industries occurred due to lack of labor force with the aging countries, the aging countries have to import goods from other countries with sufficient labor force, eventually caused the current account deficit. Robert Dekle(2002) used the Ramsey optimal-growth model to forecast the effect of population aging on macroeconomics in Japan, this research forecasted that the gross saving of Japan will decrease from 30% in 2002 to 20% in 2040, the gross investment will also decrease from 28% in 2002 to 22% in 2040 and the current account deficit will occur in 2015. It implies that the population aging has shown to negative correlated with the labor force, eventually caused the current account deficit.

2.2 The effect of aging of population on financial market

Many researchers trusted that the aging of population has significant effects on financial market. Zhong(2007) indicated that the aging of population increase the size of bond market, caused the size of stock market decreased relative to the size of bond market. Lin, Wang and

Hsu(2010) believed that people prefer the high mobility of financial assets to the low mobility of financial assets in the aging society.

Zheng and Zhong(2006) thank the people are prepare to go saving and investment for their retirement at the primary stage of population aging, nevertheless with the increasing of population aging, there are some negative effects on financial market such as the decreased of saving rate and investment rate, the population aging also caused some significant effects to the type of total asset holdings of people.

E Philip Davis(2006) indicated that with the increasing of proportion of aged 40-64, the size of stock market and the size of bond market increased simultaneously. The increasing of elderly population has positive effect on the size of bond market but has no significant effect on the size of stock market, as the increasing of elderly population, the elderly prefer safe assets to risk stock and they will decrease the weight of stock in their total asset holdings. Davis also added the pension to the aging issue and find the pension both has positive correlated with the size of stock market and the size of bond market. According to the above mentioned, in the future of aging society, the size of stock market tend to be increased but the size of bond market become increased because of the risk of the stock is high and the risk of the bond is low.

As for the effect of demographic transition on the asset return, there is no identical opinion.

Some researches approved the theory of “asset market meltdown“. A so-called “asset market

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9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan , ISBN: 978-1-922069-61-0 meltdown hypothesis“ predicts that baby boomers’ large savings will drive asset market booms that will eventually collapse because of the boomers’ large retirement dissavings. Brooks(2000) used the overlapping generations models to discuss the issue about the effect of population aging to assets return. Because of baby boomers retirement or aging, people prefer to sell the stock of high risk and buy the bond of low risk, Caused the demand of bond increased rapidly and raise the bond price. At the last, the stock return become depressed. But Deakeun Park(2005) indicated that the aging of population has negative correlated with the return of bond and has no significant effect on the stock return.

Some researchers have the different opinion to the “asset market meltdown“, their analysis shows that this meltdown hypothesis is fundamentally flawed; and baby-boom-driven asset market booms may not necessarily collapse.

Zheng and Zhong (2006) thank that “asset market meltdown“ caused the recession of investment and saving, but the population aging has no significant effect on the stock return and they denied the theory of “asset market meltdown“. E Philip Davis and Christine Li(2003) used the panel of OECD countries, the empirical result showed that both of the price of stock and the bond return decreased in the future. Park and Rhee(2005) used the panel data of 86 countries to do research, found that the aging of population has no significant effect on the stock return, meanwhile the aging of population has positive effect on the size of the bond market.

According to those researches, the research proposes some hypotheses:

(1). The aging of population decrease the saving rate.

(2). The aging of population decrease the investment rate.

(3). The aging of population cause the current account deficit.

(4). The aging of population has no significant effect on the bond return.

(5). The increasing of the proportion of ages 40-64 population decrease the bond return.

(6). The aging of population has no significant effect on the stock return.

(7). The aging of population increase the size of bond market.

(8). The aging of population decrease the size of stock market.

(9). Relative to the size of bond market, the size of stock market has been decreased because of population aging.

3



3. Research methodology

3.1 Data source

The empirical research was divided into two parts. First, we discuss the effect of Population aging to macroeconomic variables, and then observe the change of asset returns and size of financial market. About regression model, we refer to Daekeun Park and Changyong Rhee(2005) and E Philip Davis(2006). The research chooses gross savings (% of GDP), gross fixed capital formation (% of GDP) and current account to GDP in macroeconomic variables, choosing bond return, stock return, stock market capitalization (% of GDP) and bond market capitalization (% of

GDP) in financial variables.

The data source comes from World Development Indicators, Source OECD and IMF, and the data of Taiwan comes from National Statistics, R.O.C. (Taiwan). There are eight regression models in the research, the research involves three macroeconomic regression models and five financial regression models.

3.2 Definition of variables

The research separates the variables from three parts, which are macroeconomic variables, financial variables and demographic variables

(1). Macroeconomic variables

A. Gross savings (% of GDP)

Gross savings are calculated as gross national income less total consumption, plus net transfers.

B. Gross fixed capital formation (% of GDP)

Private investment covers gross outlays by the private sector (including private nonprofit agencies) on additions to its fixed domestic assets.

C. Current account balance (% of GDP)

Current account balance is the sum of net exports of goods and services, net primary income, and net secondary income.

4



D. GDP per capita (ln GDP)

GDP per capita is gross domestic product divided by midyear population. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current U.S. dollars, the research transforms the GDP per capita to ln GDP.

E. GDP growth (annual %)

Annual percentage growth rate of GDP at market prices based on constant local currency.

Aggregates are based on constant 2005 U.S. dollars. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources.

F. Cash surplus/deficit (% of GDP)

Cash surplus or deficit is revenue (including grants) minus expense, minus net acquisition of nonfinancial assets. In the 1986 GFS manual nonfinancial assets were included under revenue and expenditure in gross terms. This cash surplus or deficit is closest to the earlier overall budget balance (still missing is lending minus repayments, which are now a financing item under net acquisition of financial assets).

G. Inflation, consumer prices (annual %)

Inflation as measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly. The Laspeyres formula is generally used.

5



H. Liquid liabilities (M3) as % of GDP

Liquid liabilities are also known as M3. They are the sum of currency and deposits in the central bank (M0), plus transferable deposits and electronic currency (M1), plus time and savings deposits, foreign currency transferable deposits, certificates of deposit, and securities repurchase agreements (M2), plus travelers checks, foreign currency time deposits, commercial paper, and shares of mutual funds or market funds held by residents.

(2). Financial variables

A. Bond return

Bonds have four yields: coupon (the bond interest rate fixed at issuance), current (the bond interest rate as a percentage of the current price of the bond), and yield to maturity

(an estimate of what an investor will receive if the bond is held to its maturity date).

Non-taxable municipal bonds will have a tax-equivalent (TE) yield determined by the investor's tax bracket. The research chooses the coupon as the bond return.

B. Real stock return

The formula for the total stock return is the appreciation in the price plus any dividends paid, divided by the original price of the stock. The income sources from a stock is dividends and its increase in value. The first portion of the numerator of the total stock return formula looks at how much the value has increased (P1 - P0). The denominator of the formula to calculate a stock's total return is the original price of the stock which is used due to being the original amount invested.

C. bond market capitalization

Calculated as: market capitalization to GDP

= bond market capitalization/market GDP*100

D. Stock market capitalization

Calculated as: market capitalization to GDP

= stock market capitalization/market GDP*100

E. Pension(% of GDP)

A sum of money paid regularly as a retirement benefit or by way of patronage.

6



(3). Demographic variables

A. old age dependency ratio

Age dependency ratio, old, is the ratio of older dependents--people older than 64--to the working-age population--those ages 15-64. Data are shown as the proportion of dependents per 100 working-age population.

B. young dependency ratio

Age dependency ratio, young, is the ratio of younger dependents--people younger than

15--to the working-age population--those ages 15-64. Data are shown as the proportion of dependents per 100 working-age population.

C. Population ratio of high saving

Population ration of high saving = ages 40-64 population/ages15-64 population

D. Population ages 65 and above (% of total)

Population ages 65 and above as a percentage of the total population. Population is based on the de facto definition of population, which counts all residents regardless of legal status or citizenship--except for refugees not permanently settled in the country of asylum, who are generally considered part of the population of the country of origin.

7



3.3 Regression models

The regression models of the research are reference to Park and Rhee(2005) and E Philip

Davis(2006). There are three regression models are related to the effect of demographic transition to macro economy and five regression models are related to the effect of demographic transition to financial market.

All of the eight regression models as follows:

Y

1

= 𝛼

1

Y

1

: Gross savings 𝛽

11

:

old age dependency ratio

+ 𝛽

11

+ 𝛽 𝛽

12

:

young dependency ratio

β

13

: GDP growth

β

14

: Cash surplus/deficit

β

15

: Inflation

β

16

: Liquid liabilities (M3) as % of GDP

12

+β

13

+ β

14

+ β

15

+ β

16

+ ε

11

… (1)

Y

2

= 𝛼

2

+ 𝛽

21

Y

2

: Gross fixed capital formation 𝛽

21

:

old age dependency ratio 𝛽

22

:


+ 𝛽

β

23

: GDP growth

β

24


β

25

: Inflation

β

26


22

+β

23

+ β

24

+ β

25

+ β

26

+ ε

21

… (2)

Y

3

= 𝛼

3

Y

3

: Current account balance 𝛽

31

:

old age dependency ratio 𝛽

32

:


+ 𝛽

31

+ 𝛽

β

33

: GDP growth

β

34


β

35

: Inflation

β

36


32

+β

33

+ β

34

+ β

35

+ β

36

+ ε

31

… (3)

8



Y

4

= 𝛼

4

+ 𝛽

41

Y

4

:

Bond return 𝛽

41

:

Population ages of high saving 𝛽

42

:

Population ages 65 and above

β

43

: GDP growth

β

44


β

45


+ 𝛽

42

+β

43

+ β

44

+ β

45

+ ε

41

… (4)

Y

5

= 𝛼

5

Y

5

:

stock return 𝛽

51

:

Population ages 65 and above 𝛽

52

:

GDP growth

β

53

: real interest

β

54

: Inflation

+ 𝛽

51

+ 𝛽

52

+β

53

+ β

54

+ ε

51

… (5)

Y

6

:

bond market capitalization

Y

6

= 𝛼 𝛽

61

:


62

:

pension

β

63

: GDP per capita

6

+ 𝛽

61

+ 𝛽

62

+β

63

+ ε

61

… (6)

Y

7

:

stock market capitalization

Y

7

= 𝛼 𝛽

71

:


72

:

pension

β

73

: GDP per capita

7

+ 𝛽

71

+ 𝛽

72

+β

73

+ ε

71

… (7)

Y

8

= 𝛼

8

+ 𝛽

81

+ 𝛽

82

+β

83

+ ε

81

… (8)

Y

8

:

The ratio of the stock market capitalization/ bond market capitalization 𝛽

81

:


82

:

pension

β

83

: GDP per capita

9



4. Empirical result

4.1 Descriptive statistics

The research chooses the data of 73 countries which involves Taiwan, In table1, we use income level to separates all of the countries into three parts, high income, middle income and low income.

Table 1

The list of countries arranged in income order

Low income

Pakistan

Vietnam

India

Nigeria

Bolivia

Philippines

Middle income

Bulgaria

South Africa

Kazakhstan

Romania

Costa Rica

Panama

High income

Greece

New Zealand

Spain

Hong Kong SAR, China

Singapore

Italy

Sri Lanka

Honduras

Brazil

Argentina

France

Germany

Indonesia Malaysia Australia

Egypt, Arab Rep. Russian Federation Canada

Paraguay

Ukraine

Morocco

China

Uruguay

Turkey

Venezuela, RB

Mexico

Japan

United Kingdom

Belgium

Austria

Jordan

Ecuador

El Salvador

Thailand

Algeria

Peru

Fiji

Tunisia

Chile

Latvia

Poland

Croatia

Dominican Republic Portugal

Colombia Israel

Taiwan

Finland

Netherlands

Sweden

United States

Hungary Iceland

Slovak Republic Ireland

Czech Republic Denmark

Korea, Rep. Switzerland

Norway

Luxembourg

10



As table 1, there are 24 low income countries, 25 middle income countries and 24 high income countries. We could find that most of the low income countries and middle income countries comes from Africa, South America and Asia which were called emerging market economies or transition market and most of the high income countries comes from North America and Europe which we called advanced countries such as OECD countries.

From the data, we made descriptive statistics. Table2 shows the statistical result about all of the countries which was classified with continents. From the table2 we can see that the size of pension in the countries of North America and Europe are larger than other countries, which is obviously related to old dependency ratio and the ratio of ages 65 and above. The research think that the large size of bond in North America and Europe was caused by population aging. Although the size of stock in Asia is equal to Europe, there are obvious gap in the size of bond between Asia and Europe because of the bond market in Asia is immature. In Taiwan, the ratio of ages 65 and above is increasing rapidly, but the size of bond market in Taiwan dose not have progressed. The result is not l ike North America and Europe. So we can’t forecast the development of the size of bond in Taiwan by using the experience from North America and Europe. Though the population aging problem is serious in Asia, Europe and North America, the size of stock does not recession and become more enormous than before. The situation in Taiwan is the same, so the research think that the size of stock does not caused by population aging.

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Table 2

Statistical result saving

Asia

Mean 25.56

Std. Dev. 7.95

27.45

9.09

28.64

0.78

Europe

4.58

7.35

21.14

5.45

21.51

6.30

Africa

1981~1990 1991~2000 2001~2010 1981~1990 1991~2000 2001~2010 1981~1990 1991~2000 2001~2010

23.61

5.17

21.00

4.58

26.11

12.32

Investment

Current account

Mean 25.68

Std. Dev. 6.76

Mean

Std. Dev.

-2.03

4.34

Cash surplus

Mean -0.73

Std. Dev. 5.38

GDP growth

Mean 5.54

Std. Dev. 3.90 inflation

Mean 18.36

Std. Dev. 45.45

M3

Mean 71.75

Std. Dev. 46.48

The size of Mean 20.76 bond(public) Std. Dev. 17.51

The size of Mean 13.95 bond(private) Std. Dev. 14.08

62.20

10.14

90.95

57.72

21.97

16.62

15.86

17.42

26.83

6.73

-0.40

5.91

-0.13

6.51

4.13

5.94

6.51

7.02

57.30

19.81

31.15

8.35

17.51

19.55

24.90

6.36

1.94

7.46

-1.95

3.70

5.64

3.70

25.36

112.72

68.73

26.66

29.89

23.19

34.47

25.71

22.99

3.89

-1.17

3.68

-5.05

NA

2.36

2.67

53.27

12.33

78.89

39.27

33.58

23.60

32.45

23.47

20.58

3.98

-0.39

4.78

-1.97

3.59

1.57

5.01

3.78

4.15

85.88

61.19

33.11

19.81

42.93

45.25

21.72

3.69

-0.98

7.80

-1.26

5.09

2.41

3.82

13.08

9.20

53.87

18.07

71.39

NA

19.99

NA

26.40

4.75

-2.28

5.53

-2.58

0.88

3.12

4.38

12.34

14.67

53.38

11.90

50.87

12.17

14.67

3.54

21.72

4.05

-0.61

4.99

-0.83

2.48

2.98

3.24

6.02

4.74

48.64

7.26

29.19

4.45

13.02

2.91

22.76

4.96

3.23

9.12

-1.62

3.93

4.67

2.12

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9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan , ISBN: 978-1-922069-61-0 saving

Investment

South America

Mean 16.18

Std. Dev. 6.30

17.63

5.17

19.84

6.19

North America

18.34

2.12

17.28

2.51

17.90

4.60

Taiwan

1981~1990 1991~2000 2001~2010 1981~1990 1991~2000 2001~2010 1981~1990 1991~2000 2001~2010

33.35

3.40

27.51

1.41

27.62

1.56

Mean 18.39

Std. Dev. 4.47

Mean -3.11

Std. Dev. 5.00

19.45

3.56

-2.95

3.47

19.38

3.78

-0.66

4.92

20.24

1.73

-2.11

1.41

18.46

1.21

-1.60

1.71

19.60

2.23

-2.00

3.10

22.75

2.61

1.75

0.75

24.87

0.96

0.46

0.26

21.09

1.33

1.15

0.35

Current account

Cash surplus

Mean -0.33

Std. Dev. 4.02

GDP growth

Mean 1.51

Std. Dev. 4.91 inflation

Mean 307.11

Std. Dev. 1264.29

M3

Mean 32.83

Std. Dev. 16.02

The size of Mean 11.26 bond(public) Std. Dev. 7.99

The size of Mean 2.47 bond(private) Std. Dev. 3.85

-0.66

2.01

3.84

3.53

59.24

253.17

28.01

8.75

12.54

9.71

4.63

4.90

-1.56

3.18

4.05

4.12

7.11

6.76

34.88

12.39

23.06

14.15

8.37

7.45

NA

NA

3.05

2.39

5.35

2.71

72.12

5.05

58.69

9.26

43.65

34.70

-2.27

3.06

3.19

1.94

2.40

1.18

72.01

5.70

62.94

10.22

50.61

31.12

-1.75

3.62

1.73

1.93

2.21

0.97

88.17

31.54

52.59

8.28

68.86

39.97

-1.43

2.32

7.65

2.65

1.69

1.73

104.80

28.65

NA

NA

NA

NA

-4.96

0.39

6.24

1.31

2.59

1.48

172.62

11.20

2.53

0.89

2.18

0.65

-2.14

-0.56

3.93

3.87

0.95

1.36

209.53

13.86

4.05

0.49

3.47

0.73

13



The size of stock

Mean

South America

37.69

Std. Dev. 41.37

52.35

54.48

61.98

54.56

North America

43.51

47.42

46.87

51.04

61.97

53.99

Taiwan

1981~1990 1991~2000 2001~2010 1981~1990 1991~2000 2001~2010 1981~1990 1991~2000 2001~2010

23.81

41.72

39.38

53.57

67.06

73.89

The size of Mean pension Std. Dev.

NA

NA

Dependency of old

Mean 8.79

Std. Dev. 3.48

Dependency Mean of young

58.81

Std. Dev. 17.85

The ration of Mean 5.37 ages 65 and

Std. Dev. 2.47 above

31.79

27.14

9.86

4.70

49.83

16.44

6.33

3.32

18.07

21.52

10.36

4.19

42.19

13.49

6.92

3.04

NA

NA

19.16

3.00

32.53

5.59

12.64

2.00

18.77

33.76

21.13

2.88

28.76

4.17

14.10

1.91

24.46

35.54

22.91

3.49

24.84

3.70

15.49

2.19

NA

NA

6.66

0.74

77.78

6.74

3.61

0.40

28.04

47.23

7.05

1.28

65.99

10.07

4.10

0.88

27.40

39.12

7.54

1.35

52.09

13.60

4.79

1.10

14



The size of Mean stock

South America

8.29

Std. Dev. 10.54

19.24

21.69

29.04

28.08

North America

52.83

5.90

87.25

36.47

117.98

17.44

Taiwan

1981~1990 1991~2000 2001~2010 1981~1990 1991~2000 2001~2010 1981~1990 1991~2000 2001~2010

NA

NA

102.04

28.84

134.88

32.86

The size of Mean pension Std. Dev.

24.35

NA

Dependency of old

Mean 8.39

Std. Dev. 3.04

Dependency Mean of young

67.66

Std. Dev. 14.28

The ration of Mean 4.84 ages 65 and

Std. Dev. 2.03 above

11.31

16.05

9.24

3.43

59.58

11.28

5.53

2.25

14.85

15.15

10.28

3.57

50.17

9.95

6.45

2.34

NA

NA

16.64

1.63

32.11

1.08

11.17

0.93

64.98

15.50

18.40

0.80

31.36

1.89

12.28

0.38

63.02

9.06

18.91

0.56

27.99

2.92

12.88

0.54

0.83

0.16

7.98

0.83

44.89

3.14

5.23

0.62

1.98

0.93

11.14

0.85

34.32

3.22

7.67

0.71

4.75

0.63

13.68

0.75

25.62

2.82

9.83

0.68

15


9 - 10 October 2014, Howard Civil Service International House, Taipei, Taiwan ,

ISBN: 978-1-922069-61-0

4.2 Regression result

Population aging may have different effects on different assets in different income level countries.

Table 3

Regression result for the saving rate variables All country low income middle income high income old age dependency ratio

-0.475*** 0.006

(-3.24) (0.01)

-0.936***

(-2.81)

-0.173

(0.13)

Young age dependency ratio

Growth rate

-0.169*** -0.186*** -0.293*

(-5.02) (-4.48) (-1.86)

0.118**

(2.26)

0.241**

(2.60)

0.023

(0.37)

-0.315

(-1.50)

0.142

(1.43)

Cash surplus/GDP inflation

Liquidity/GDP

0.439*** 0.260**

(6.74) (2.33)

0.0004

(1.35)

-0.020*

(-1.80)

0.0005

(1.43)

-0.001

(-0.02)

0.293**

(2.16)

0.049

(0.63)

-0.051**

(-2.56)

Adjusted R-squared 0.24142 0.213242 0.353262 n 297 139 89

0.580***

(6.70)

-0.018

(0.34)

0.038**

(0.28)

0.627569

69

Note:*, ** and *** mean the null hypothesis of zero coefficient can be rejected at the significant level of 10%, 5% and 1%, respectively.

Table3 shows the effect of demographic transition to saving rate. The research uses the panel data of 73 countries during 30 periods. In the regression result, with regard to the population variables, both old age dependency ratio and young age dependency ratio have a noticeable effect on saving rate. A rise in either ratio decreases the saving rate and the effect of old age dependency ratio is stronger than young dependency ratio. The effect of old age dependency ratio to saving rate is strongest in middle country, It reveals a phenomenon that if the proportion of the elderly and little child become more than working age population, to maintain those people who have no labor force, the expenditure of households will increased and the saving rate of households will decreased, it is same to our hypothesis.

16



ISBN: 978-1-922069-61-0

Upon analyzing the relationship between fiscal monetary variables and the saving rate, it becomes clearly that the cash surplus/GDP ratio of a country has a noticeable positive correlation with the saving rate, a 1 percent point increase in the Cash surplus/GDP will lead to a 0.439 percent point increase in the saving rate of all countries. With the increase of the growth rate, the saving rate will increase simultaneously in all countries and low income countries.

Meanwhile, the inflation has no significant relationship with the saving rate, nor does the liquidity/GDP seems have no significant relationship with the saving rate.

Table 4

Regression result for the investment rate variables All country low income middle income high income old age dependency ratio


-0.367*** -0.403

(-3.10) (-0.91)

-0.027

(-0.88)

-0.013

(-0.36)

-2.372***

(-6.54)

-1.056***

(-6.30)

-0.372***

(-3.59)

-0.238*

(-1.69)

Growth rate

(3.84)

0.067

(2.58)

0.018

(3.97)

-0.440***

Cash surplus/GDP

(1.07)

-0.0003

(0.17)

-0.0003

(-3.23)

0.097 inflation

(-0.93)

0.015

(-0.80)

0.054*

(1.25)

-0.071***

Liquidity/GDP

(1.52) (1.90) (-3.37)

Adjusted R-squared 0.089735 0.051736 0.418938 n

0.197***

297

0.236**

139

0.250***

89

-0.113

(-1.32)

0.326***

(6.26)

0.380***

(2.71)

0.015

(1.43)

0.556391

69


Table 4 shows the result of the regression how the investment rate to be changed as the dependent variable. It is same to the regression for the saving rate ， both old age dependency ratio and young age dependency ratio have significant effect on investment rate, old age dependency ratio is shown to decrease the investment rate in all countries, middle income countries and high income countries, while young age dependency ratio is shown to only

17



ISBN: 978-1-922069-61-0 decrease the investment rate in low income countries and has no significant effects in other income level countries.

The regression result implies that as the supply of labor and the average labor productivity decrease due to population aging and the economic situation becomes pessimistic, with the subsequent contraction in investment. Declining investment in turn implies a decrease in the supply of financial assets to the financial investment. Thus, if population aging decreases not only saving rate but also investment rate and it is related to the demand of capital, it is possible that population aging may decreases asset prices.

Table 5

Regression result for the current account/GDP ratio variables All country low income middle income high income old age dependency ratio


-0.040

(-0.36)

-0.140***

(-4.11)

0.019

(0.03)

-0.203***

(-4.33)

0.163

(1.11)

0.086

(1.08)

0.158

(0.70)

-0.066

(-0.24)

Growth rate

(-4.48) (-2.90) (-3.87)

0.403*** 0.455*** 0.323***

Cash surplus/GDP

(5.65)

-0.0001

(3.53) (2.64)

-0.00003 0.016 inflation

(-0.26)

-0.005

(-0.07)

-0.042

(0.21)

0.012

Liquidity/GDP

(-0.47) (-1.10) (1.05)


-0.269***

295

-0.319***

139

-0.259***

87

-0.005

(-0.03)

0.333***

(4.00)

-0.649***

(-2.89)

0.035*

(1.74)

0.354583

69


Because aging lowers both saving rate and investment rate, the effect of aging to current account balance becomes dependent on which rate declines more. Table5 shows the regression result for the current account/GDP ratio.

The aging has no significant effect on the current account/GDP ratio because the decline in the investment rate caused by aging is greater than the decline in the saving rate and both of them will be offset by each other. The result is different to Park and Rhee (2005) But in the future, the current account

18



ISBN: 978-1-922069-61-0 balance of aged countries may become negative as the more serious population aging.

19



ISBN: 978-1-922069-61-0

Table 6

Regression result for the bond return variables All country low income middle income high income

Population ratio of high saving

-0.294*** n/a

(-5.72) n/a n/a n/a

-0.235***

(-3.21)

Population ages

65 and above

Growth rate

0.281*** n/a

(2.91) n/a

0.081*

(1.78) n/a n/a n/a n/a n/a n/a

0.242*

(1.82)

0.146**

(2.18)

Liquidity/GDP

Cash surplus/GDP

-0.028*** n/a

(-7.54) n/a

-0.122** n/a

(-2.33) n/a n/a n/a n/a n/a

-0.017***

(-2.77)

-0.215***

(-4.06)

Adjusted R-squared 0.515273 n 95

0.480970

61


Tables 6 shows the regression result for the bond return, there is no regression results for low income countries and middle income countries because lack of enough data for the two income level countries. In the regression result, the population ratio of high saving has significant effect on bond return, population ratio of high saving is shown to decrease the bond return, it implies that if the proportion of ages 40-64 population increased, the bond return will decreased. Brooks(2000) used the overlapping generations models to discuss the issue about the effect of population aging to assets return. Because of baby boomers retirement or aging, people prefer to sell the stock of high risk and buy the bond of low risk, Caused the demand of bond increased rapidly and raise the bond price. At the last, the stock return become depressed. Meanwhile the population ages 65 and above was positively correlated with the bond return in all countries and high income countries, the research think that as the more serious population aging in high income countries, the government have to issue more government debt to pay the spending about eldercare, which caused the bond price became lower and increase the bond return.

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ISBN: 978-1-922069-61-0

Table 7

Regression result for the real stock return variables All country low income middle income high income

Population ages

65 and above

0.109

-0.89

1.268*** n/a -0.051 0.238

Growth rate n/a n/a

(-0.15)

1.408***

-1.18

1.693***

-7.53 n/a -3.87 -8.14

Interest rate

0.048

-0.75 n/a n/a

0.022

-0.22

-0.057

(-0.42)

0.149 n/a 0.150*** 0.360*** inflation

-5.63 n/a -3.85 -2.65

Adjusted R-squared 0.115184 n

0.116122 0.145147

751 219 472


The regression result for the stock return was shown in table7. It is clearly that the population ages 65 and above does not show a strong relationship with the stock return, it implies that the population aging will not lower the stock price. The research does not find the asset market meltdown in all of the countries. According to the regression results, Both of growth rate and inflation have positive effects on real stock return.

Table 8

Regression result for the size of bond market variables All country low income middle income high income

Population ages

65 and above

Pension/GDP ratio

5.775*** 7.858*** 0.477

(10.00)

-0.010

(-0.19)

(4.40)

0.941***

(6.16)

(0.73)

0.010

(0.14)

10.438***

(11.31)

0.024

-6.920 -9.807*** 1.705 ln GDP pc

(-4.96) (-3.56) (0.30)


(0.34)

-19.148***

(-7.25)

0.358492

446 52 163 231

Note:*, ** and *** mean the null hypothesis of zero coefficient can be

21



ISBN: 978-1-922069-61-0 rejected at the significant level of 10%, 5% and 1%, respectively.

The table8 shows the regression analysis with the ratio on the bond market size to GDP as the dependent variable. The size of bond market is measured as the total amount of bonds outstanding which involves private and public. As shown in the table, the population ages 65 and above show a significant effects on the size of bond market, the positive correlations between the proportion of the elderly population and the size of bond market in all countries, low income countries and high income countries are identical. In the latter’s case , the elderly prefer safe assets to risk assets and as a result will increase the weight of bond in their total asset holdings, for the reason to increase the demand of bonds. Meanwhile the government meet the demand of bond, they increase the supply for it.

Table 9

Regression result for the size of stock market variable

Population ages

65 and above

All country low income middle income high income

-3.139** -2.162

(-2.24) (-0.83)

-2.480***

(-2.65)

-5.702

(-1.63)

Pension/GDP ratio

0.871*** 1.425*** 1.254***

(5.98) (4.44) (8.90)

0.614**

(2.24) ln GDP pc

17.793*** 21.854*** 13.604***

(5.19) (3.58) (5.63)

Adjusted R-squared 0.140355 0.330643 0.39003 n 595 121 241

14.841

(1.44)

0.034836

233


The table 9 shows the regression analysis with the ratio on the stock market size to GDP as the dependent variable. The size of bond market is measured as the total amount of bonds outstanding. It is clearly that the population ages 65 and above has significant effect on the size of stock market, population ages 65 and above is shown to decrease the stock market. As the increasing of elderly population, the elderly prefer safe assets to risk stock and they will decrease the weight of stock in their total asset holdings. The result is identical to the research’s hypothesis.

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ISBN: 978-1-922069-61-0

Table 10 shows the regression analysis with the ratio of the stock market size/bond market size as the dependent variable. In the regression model, it is clearly that the population ages has significant effects on the ratio of the stock market size/bond market size in all countries and low income countries.

Table 10

Regression result for the ratio of the stock market size/bond market size variable

Population ages

65 and above

All country

-62.562*

(-1.90) low income

-0.332**

(-2.15) middle income

-0.090

(-0.34) high income

-106.665

(-1.54)

Pension/GDP ratio

-6.988**

(-2.05)

-0.017

(-0.78)

0.003

(0.11)

-11.485**

(-2.09) ln GDP pc

Adjusted R-squared n

399.434*** 1.423***

(2.89) (4.18)

0.01269

444

0.192105 0.025512

52

1.174**

(2.30)

161

1273.557***

(3.12)

0.034132

231


It is said that relative to the size of bond market, the size of stock market has been decreased because of population aging. It implies that with population aging, people prefer bond to stock, the size of bond market increased relative to the size of stock market. Upon analyzing the relationship with pension funds and the ratio of the stock market size/bond market size, the situation is similar to the population ages 65 above that pension funds decreases the size of stock market and increases the size of bond market relatively.

5. Conclusion

According to the research, we find that most of the high income countries and middle income countries face the population aging. Baby boomers’ aging and retirement, late marriage and the birth rate declination cause the rise of dependency old and the decrease of dependency young, which made the labor force to be decreased. If a country lack of sufficient labor force, it will lose many investment choices and encounter some economic problems and financial risks.

23



ISBN: 978-1-922069-61-0

Population aging may have different effects on different income level countries. We investigate the effect of population aging on economies and financial markets through a regression analysis using a cross-country panel data. For economy, population aging will decrease a country’s saving rate and labor force, although there are sufficient equipment, there are not enough labors to use it. Because of lower labor force, developed countries have to import goods from developing countries, which may cause the negative of current account to GDP.

For financial markets, the regression analysis demonstrates that the proportion of elderly population do not seem to be correlated with the stock return. On the other hand, the regression analysis demonstrates that the proportion of elderly population is positively correlated with the size of bond market, whereas it is negatively correlated with the size of stock market. When people become older, they will buy bond and sell stock because the stock is full of risk, which is the worldwide trend. But in Taiwan, the size of bond market is not increased because the maturity of bond market in Taiwan is not like

North America and Europe, we can find that whether is the population aging increases the size of bond market hinges on the maturity of a country. As the population aging, the pension will increased, if we can use the pension efficiently, the rising pension will be a steady source of funds for stock market.

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ISBN: 978-1-922069-61-0

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26

Proceedings of 3rd Global Business and Finance Research Conference

The Effect of Demographic Transition to Capital Market

Ming-Chang Cheng, Chien-Chi Lee, Hui-Chuan Wang and Tien-Chun Kuo****

1. Introduction

2. Literature Review

3. Research methodology

4. Empirical result

5. Conclusion

Reference

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Proceedings of 3rd Global Business and Finance Research Conference

The Effect of Demographic Transition to Capital Market

Ming-Chang Cheng*, Chien-Chi Lee**, Hui-Chuan Wang*** and Tien-Chun Kuo****

1. Introduction

2. Literature Review

3. Research methodology

4. Empirical result

5. Conclusion

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Ming-Chang Cheng, Chien-Chi Lee, Hui-Chuan Wang and Tien-Chun Kuo****