Page 335 - Contributed Paper Session (CPS) - Volume 7

CPS2120 Grażyna Trzpiot et al.

The impact of longevity on a valuation of long-
term investments returns: the case of selected
european countries
Grażyna Trzpiot, Justyna Majewska
Department of Demography and Economic Statistics, University of Economics in Katowice,
Poland, 40-881 Katowice, grazyna.trzpiot@ue.katowice.pl

Abstract
Both individuals and governments are increasingly concerned about effects of
aging. Individuals are more concerned about increased longevity, because it
affects their own financial and labour market plan, whereas governments are
more concerned about old-age dependency as an aspect of population aging.
Improvements in longevity and changing structure of population impact
economy and financial stability. In this paper, we consider some economic,
financial and demographic variables in a context of their impact on longevity.
The Principal Component Regression is used in order to construct investment
portfolios that are sensitive to risk factors.

Keywords
longevity; risk; PCA; investments; portfolios

1. Introduction
The recent analysis on lower long-term investment returns expectations
over the next 20 years than they were in the past three decades is the
inspiration for this paper (McKinsey, 2016). Individuals would need to save
more for retirement, retire later, or reduce consumption during retirement.
The global longevity trend will impact long-term investments returns. We
attempt to identify risk factors that could have influence on the long-term
investment return. Assessment of impact of each risk factor on portfolio
returns regardless of the fixed risk level and scenarios creation is provided.
Representative countries with different economy growth level and
demographic situation are selected by cluster analysis. The Principal
Component Analysis (PCA) is used to specify risk factors. The multifactor
regression models (the Principal Component Regression, PCR) were built to
describe the return rates of the assets (stock and bond) and risk factors. Three
investment portfolios with different risk level (low, medium and high) was
proposed as a particularly possibly investments, and they are considered as
scenarios for the future level of long-term investment rates of return for
selected countries. The paper extends existing analysis on effect of aging on
economy and financial markets.

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