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The Discussion Note series provides analysis which may form relevant background for Norges Bank Investment Management’s investment strategy and advice to the asset owner. Any views expressed in the Discussion Notes are not necessarily held by our organisation. The series is written by employees, and is informed by our investment research and our experience as a large, long-term asset manager.
Discussion note 16 - 4 December 2012
The Value Effect
In this note, we review the theory and empirical evidence of the value effect. The value effect is the excess return that a portfolio of value stocks (stocks with a low market value relative to fundamentals) has, on average, earned over a portfolio of growth stocks (stocks with a high market value relative to fundamentals). We will focus our attention in this note on the existence of a value effect in equity markets.
DISCUSSION NOTE 15 - 22 November 2012
Modelling the implied tail risk of foreign exchange
From a risk management perspective, tail risks and return distribution asymmetries of investments are important to analyse. In this note, we describe a modelling approach that addresses some of the weaknesses of standard risk models.
Discussion Note 14 - 19 November 2012
In this discussion note, NBIM’s expectations on corporate governance are presented. Expectations directed at boards are discussed, as is the rationale for focusing on board ccountability and equal treatment of shareholders. In the discussion, the academic literature underpinning NBIM’s approach to corporate governance and opinions offered by leading industry ractitioners are presented. Two sets of expectations are included as appendices that conclude the note.
Discussion Note 13 - 19 November 2012
Well-functioning financial markets
In this note we discuss the theoretical foundation for well-functioning financial markets and why well-functioning financial markets are essential to reach the objective for the management of the Fund. Against this background we discuss, how NBIM may work to influence how the markets we invest in function.
DISCUSSION NOTE 12 - 15 October 2012
A Survey of the Small-firm Effect
The small-firm effect (SFE) refers to the long-term average excess returns that a portfolio of small-capitalisation stocks earns over a portfolio of large-capitalisation stocks. In this note, we review the extensive empirical evidence on the SFE and the various theoretical explanations that researchers have put forward for the effect.
Discussion note 11 - 18 September 2012
Board appointment practices - an international overview
Shareholders receive return on their invested equity only after the company has ensured the fulfilment of obligations to all other parties. Shareholders are therefore rightly given prerogatives to influence the company, through the approval of certain corporate decisions including, not least, the appointing of the board. This note provides a brief overview of board appointment practices in 10 equity markets. It does not seek or claim to give a full description of all relevant aspects or considerations.
DISCUSSION NOTE 10 - 17 August 2012
Risks and Rewards of Inflation-Linked Bonds
Inflation-linked bonds are fixed-income securities whose principal and coupons are linked to price indices. They are designed to eliminate the risk of unexpected inflation to the holders of the bonds. In this discussion note, we compare the risks and rewards of inflation-linked bonds with those of nominal fixed-income securities. We also evaluate the role of index-linked bonds in diversified portfolios.
Discussion NOTE 9 - 17 August 2012
The Structure of Inflation-Linked Bond Markets
We describe the market structure of global inflation-linked bonds to evaluate to what degree they constitute an investable and homogeneous asset class. In particular, we discuss the market's growth, size and composition relative to nominal bonds. We also pay attention to the design of inflation-linked securities across countries and market-specific demand and supply factors.
Discussion NOTE 7 - 30 March 2012
Alternatives to a Market-value-weighted Index
We study alternative portfolio construction methods in an attempt to improve the return-to-risk characteristics of market value weights. To understand the investability of these approaches we introduce a novel way to measure the investment capacity of a portfolio relative to the market-valueweighted index.
Discussion NOTE 6 - 30 March 2012
Risks and Rewards in Emerging Equity Markets
We survey the literature on the risks and rewards in emerging equity markets. Drawing on theoretical and empirical arguments, we assess whether a long-term investor should have a strategic allocation to these markets that deviates substantially from the market capitalisation weights.
Discussion NOTE 5 - 30 March 2012
Economic Growth and Equity Returns
We study the links between economic growth and equity market returns to evaluate whether structural changes to global growth composition have implications for longer-term strategic allocations. In particular, we assess whether the projected rise in emerging markets’ share of the world economy warrants an allocation to emerging asset markets that deviates from market weights.
Discussion NOTE 3 - 30 March 2012
Empirical Analysis of Rebalancing Strategies
We review the theoretical foundation for rebalancing regimes and look at the impact of rebalancing on the portfolio’s risk and return based on historical return data from 1970 to 2011. We compare both different calendar based rebalancing regimes and different threshold based regimes with the performance of a drifting mix portfolio. Towards the end of the note we focus on the specific design of a rebalancing regime. In particular, we look at a trigger based regime and examine different designs of the threshold level, persistence requirement and implementation rule.
Discussion NOTE 1 - 30 March 2012
Time-varying expected returns and investor
What is the optimal rebalancing policy for a portfolio’s equity and bond holdings? The classical answer, building on the seminal contributions by Mossin (1968), Merton (1969, 1971), Samuelson (1969) and others, is that investors should hold a constant proportion of bonds and equities in their portfolios. During the 1980s and 1990s, empirical and theoretical research began to challenge the fundamental premises for this result.