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The meltdown hypothesis predicts a large fall in stock prices when baby boomers cash in their equity holdings to fund their retirement. Using an estimated vector autoregression model this paper finds empirical evidence that retiring baby boomers will induce a drag on the stock market, but most likely not of meltdown proportions. An important discovery is that the response to shocks to the supply of equity securities is a key factor in short-term market price movements. Foreign buying associated with the current account deficit is shown to be a minor influence on stock prices.
