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Norges Bank forges closer research links

Some of the brightest investment minds gathered recently in Oslo for the first Financial Research Conference, conducted by the asset management arm of Norway’s central bank.

Norges Bank Investment Management (NBIM) chief executive Yngve Slyngstad (pictured) told the attendees that the conference was part of a broader engagement with finance academics to “bridge the gap between the world of academic finance and the world of investment professionals”.

As part of this effort, the Norges Bank has set up the Norwegian Finance Initiative (NFI), which has a permanent advisory board of academics.

“We have a long-term interest in the pursuit of excellence in financial economics carried out by individuals and academic institutions close to us,” Slyngstad said in his closing address to the conference.

“The fund will benefit if we conduct our business in an environment where conventional views are challenged and people strive for new insight.”

NBIM manages the Government Pension Fund Global – which is often referred to as the Norwegian oil fund – and most of Norges Bank’s foreign exchange reserves.

Slyngstad said the focus of research would be in areas that could directly benefit the fund and have a practical influence on its investment decision-making.

“Development in asset pricing and portfolio theory goes to the heart of how we think about, define and develop the fund’s strategy,” he said.

“Other areas of financial economics also have direct relevance to our business. Corporate finance and research on corporate governance issues will influence how we exercise our ownership rights and develop ownership policies.

“I also believe that research in the field of market microstructure, how the different marketplaces work, and the impact our own actions have on these markets, is a rich field for future research. New insights in the field of market microstructure may influence how we execute trades.”

The initiative’s Scientific Advisory Board will feature prominent academics and is chaired by Richard Green, a professor of financial economics at the Tepper School of Business at Carnegie Mellon University.

A former president of the American Finance Association and former editor of the Review of Financial Studies and the Journal of Finance, Green’s research interests include the pricing of financial assets and the effects of risk and taxes on financial asset returns and corporate decision-making.

The other members of the board are Per Strömberg and Annette Vissing-Jørgensen.

Strömberg is the director of the Institute for Financial Research (SIFR) and professor of finance at the Stockholm School of Economics. He is also an adjunct professor of finance at the Booth School of Business at the University of Chicago. His research has primarily focused on the two areas of bankruptcy and private equity finance.

Annette Vissing-Jørgensen is professor of finance at the Kellogg School of Management at Northwestern University.

Her research covers household portfolio choice, stock market participation, returns to entrepreneurial investment and corporate governance.

“The research interests of the members of the Scientific Advisory Board are of direct relevance to the fund’s management and what we hope to achieve through the NFI,” Slyngstad said.

The conference was opened by Oystein Olsen, the governor of Norges Bank.

He said the scholars presenting papers at the conference analysed how and why market risk premiums vary.

“Financial regulations and financial frictions are important to our understanding of why risk premiums change over time,” he told the conference.

“A thorough understanding of financial regulations and financial frictions might also be important in identifying unique investor characteristics.”

Addressing the question of financial regulation and its potential effects on markets was Axel Weber, the former head of the German Bundesbank.

Now professor at the University of Chicago Booth School of Business, Weber is set to be appointed to the board of Swiss banking giant UBS next year.

He was also a member of the governing council of the European Central Bank between 2004 and 2011, and in recent years also acted as a member of the steering committee on the European Systemic Risk Board.

Other prominent speakers at the one-day event included Kenneth Froot, who is a professor of business administration at the Harvard Business School.

Froot talked about rare events and disaster risks, and how these events are priced in markets.

He also gave insights on individual investor characteristics which give comparative advantages in holding these priced risk premiums.

Kenneth French, a professor of finance at the Tuck School of Business at Dartmouth College, spoke about the two ways an investor can generate excess returns by using informational advantages and by systematically harvesting risk premiums, which the investor has a comparative advantage in holding.

Both Froot and French talked about average portfolio weights in highly competitive markets.

But in the last academic address at the conference, Stanley Zin, a professor of economics and business at the Leonard N. Stern School of Business, covered how different investors will change asset weights over time.

Zin, whose work has been credited with having a major influence on modern asset pricing models, also discussed what kind of risks an investor is exposed to through rebalancing and why different investors might look at the same risk-reward trade-off differently.

Also from New York, Lasse Pedersen, a professor of finance and alternative investments at the NYU Stern School of Business, addressed liquidity and frictional finance.

Pedersen is part of the Liquidity Working Group meeting at the Federal Reserve Bank of New York to address liquidity issues. He also serves on the New York Fed’s Monetary Policy Panel.

His research has focused on the microstructure of funding markets and how liquidity risks create systemic problems. At the conference he covered frictions in financial markets.

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