As both demand for premises and rent levels have remained relatively unchanged, it is therefore likely that the price upturns in recent years are due more to a decline in investors’ required rate of return. The required rate of return depends partly on the yields on long-term government bonds, as these function as a risk-free alternative to investment in property. The required rate of return also depends on how much investors demand in compensation for investing in higher risk assets, such as property, that is, what risk premium they demand. Interest on government bonds rose in total during the first quarter of the year. All other things being equal, t his should raise the required rate of return. However, over the past year the required rate of return has fallen. This could either be due to investors expecting rents to rise in future, or that they have demanded a lower risk premium. A lower risk premium is in itself not surprising. The risk premiums on a number of different assets have fallen around the world in recent years. But as for a number of other markets, there may be reason to wonder whether the low risk premium on office premises is reasonable. However, one must remember that property companies have had very strong profit growth in recent years. Unlike the crisis years, property companies currently have much better margins to manage some dampening of prices. I therefore do not believe at present that developments in the commercial property market comprise any threat to financial stability.
Øystein Olsen: Financial economics and the challenges in managing Norway’s Government Pension Fund Introductory remarks by Mr Øystein Olsen, Governor of Norges Bank (Central Bank of Norway), at the NBIM (Norges Bank Investment Management) Financial Research Conference, Oslo, 30 August 2011. *  *  *  It is a great pleasure for me to welcome each of you to the first NBIM Financial Research Conference. The objective of today’s conference is to present and discuss a set of papers at the forefront of academic research on financial economics. This event is also part of Norges Bank’s efforts to strengthen ties with the academic community. In addition to some of the best researchers in financial economics, we have in this room some of the top investment professionals in Norway. The opportunities for interesting discussions should be good. At the outset, the intention of this conference was to present leading academic research, without placing weight on its direct relevance to NBIM. However, as this conference will show, there is considerable common ground between the research frontier of financial economics and our challenges in managing the Government Pension Fund. Over the last three decades, researchers have moved a long way from the Capital Asset Pricing Model. One important result of empirical financial research is that expected returns on traded assets vary much more over time and across assets, than was previously thought and implicitly assumed by the CAPM.