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John Cochrane, Hoover Institution, Stanford University and NBER




Several important groups of capital market investors, including public and private defined benefit pension plans, sovereign wealth funds, and endowments associated with foundations, colleges, and universities, have very long investment horizons. In some cases, for example for universities, these long horizons are the result of an institutional mission to serve current and future generations. In others, the long horizon results from liability-driven investing in the presence of very long-duration liabilities.

How well does standard investment theory capture the key tradeoffs facing these investors? The theory of intertemporal portfolio choice suggests that hedging against future deterioration in the investment opportunity set is more important for long- than for short-horizon investors. The extent to which such hedging translates into differences in asset allocation and portfolio holdings is an empirical question. How do long-horizon investors affect asset prices and the performance of capital markets? Does the presence of these investors, who may be more concerned with issues of corporate governance and with a range of low-probability but high-cost risk factors than investors with shorter horizons, affect firm behavior?

To spur research on the theory and practice of long-term investing, and with the generous support of the Norwegian Finance Initiative, in 2016 the NBER launched a project on New Developments in Long-Term Asset Management. The fifth research conference in this series was held virtually on January 21-22, 2021. The keynote address at this conference was delivered by NBER Research Associate John Cochrane, the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution at Stanford University. His talk began with the observation that there are substantial differences between the lessons of modern portfolio theory and many of the practices of long-term investors. He then asked whether there are missing elements of the theory that are suggested by the behavior of practitioners, whether there are elements of the theory that practitioners should incorporate in their investment decisions, and more generally whether there are ways to better connect theory and practice regarding long-term investing.

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Participants

Simona Abis, Columbia University
Christopher S. Anderson, Federal Reserve Board
Francesca Bastianello, Harvard University
Vincent Bogousslavsky, Boston College
Dirk Broeders, De Nederlandsche Bank
Edwin Cass, Canada Pension Plan Investment Board
Indraneel Chakraborty, University of Miami
Michael Chin, Norges Bank Investment Management
Victor DeMiguel, London Business School
Thomas J. Gilbert, University of Washington
Yariv Haim, Sparrow Capital
Elizabeth Hewitt, Sloan Foundation
Christopher M. Hrdlicka, University of Washington
Antti Ilmanen, AQR
Howell Jackson, Harvard University
Kathryn Kaminski, AlphaSimplex Group LLC
Feifei Li, Research Affiliates
Lise Lindbäck, The Norwegian Finance Initiative
Anton Lines, Columbia University
Egor V. Matveyev, Massachusetts Institute of Technology
Lars Meuller, Canada Pension Plan Investment Board
Claus Munk, Copenhagen Business School
Giovanna Nicodano, University of Turin
Pavol Povala, Norges Bank Investment Management
Kasper Roszbach, Norges Bank
Nathanaël Vellekoop, University of Toronto
Michela Verardo, London School of Economics
Vegard Vik, Norges Bank Investment Management
Fredrik Willumsen, Norges Bank Investment Management
Jing Jian Xiao, University of Rhode Island

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