Chasing Winners in the Gray Wave: Aging Population and Its Effects on Long-Horizon Momentum Profits

Abstract

The momentum effect is postulated to be a consequence of the disposition effect, which in turn, is a result of the interplay between the typically dominant diminishing sensitivity feature of prospect theory and the loss aversion feature. However, studies have shown that older individuals can exhibit a reverse disposition effect due to their heightened loss aversion compared to younger individuals. This paper hypothesizes that as the population ages, the disposition effect of the average investor starts to diminish, thereby inducing a corresponding weakening of the momentum effect. We find empirical evidence showing that the long-horizon momentum profits are negatively related to changes in the proportion of the older population.

Keywords:

• Momentum
• Demographics
• Prospect theory
• Loss aversion
• Diminishing sensitivity
• Aging population
• Disposition effect

JEL CLASSIFICATION:

• G000
• G350
• C320

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 https://www.federalreserve.gov/econres/scfindex.htm.

2 The returns reported by Kenneth French are all multiplied by 100, and the data is available at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.

3 North America includes United States and Canada.

4 Europe includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and United Kingdom.

5 Asia Pacific ex Japan includes Australia, Hong Kong, New Zealand and Singapore.