Lasse Heje Pedersen, Copenhagen Business School

“Active vs. passive investing in pension funds” based on the paper “Sharpening the arithmetic of active management”

I challenge Sharpe’s (1991) famous equality that “before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar.” This equality is based on the implicit assumption that the market portfolio never changes, which does not hold in the real world because new shares are issued, others are repurchased, and indices are reconstituted so even “passive” investors must regularly trade. Therefore, active managers can be worth positive fees in aggregate, allowing them to play an important role in the economy: helping allocate resources efficiently. Passive investing also plays a useful economic role: creating low-cost access to markets.


Jesper Rangvid, Copenhagen Business School

“What rate of return can we expect over the next decade? Methods to forecast long-horizon returns”

I evaluate how a range of stock market predictors have captured fluctuations in long-term (10 years) US real stock returns during the 1891-2016 period. Two predictors stand out: (i) the cyclical-adjusted earnings yield (CAPE) and (ii) the ‘sum of the parts’, in this case the sum of the dividend yield, GDP growth, and mean reversion in the stock price-GDP multiple. I use CAPE and the ‘sum of the parts’ to calculate time-series estimates of expected returns on stocks throughout history. Currently, real returns from stocks are expected to be low over the coming decade. Together with expected low real returns from bonds, this implies expected low returns from a typical equally-weighted stock/bond portfolio. I briefly discuss implications of low expected returns.


Arna Olafsson, Copenhagen Business School

“How does spending of individuals change around the time of retirement?”

Household spending typically amounts to about 60% of GDP in developed countries and is the most important part of aggregate demand. Understanding how consumers respond to the onset of their retirement is therefore essential for economic analysis of demand. In this paper, we use an accurate panel of individual spending and income to investigate what drives changes in spending around retirement. The longitudinal nature of our data allows us to estimate fixed effects models, which help us tackle both self-selection and common-shocks issues.


James Poterba, MIT and NBER

"The challenges of retirement saving in a low-return environment"

Long-term rates of return on safe assets have declined substantially in the last two decades.  Accumulating resources to provide for a secure retirement, in either a defined benefit or a defined contribution plan, is much more difficult in a low-return environment than in a period of higher returns.  This presentation will outline the consequences of lower expected returns for both the accumulation and draw-down phase of retirement saving programs, and highlight the implications of declining long-term rates for the saving rates that are needed to support retirement.


Clemens Sialm, University of Texas at Austin

“Defined contribution pension plans: Structure, incentives, and performance”

Over the last decades there have been significant changes in the structure of retirement savings across the world. The importance of government‐provided social security has declined and many firms have switched from Defined Benefit (DB) to Defined Contribution (DC) pension plans. These changes have transferred more responsibility about retirement savings to households who might not have the information, the time, and the ability to make optimal savings and investment decisions. It is therefore crucial that retirement savers are provided with investment options that allow them to hold a diversified portfolio that offers favorable risk‐adjusted returns. In my presentation I will discuss the structure, incentives, and the performance of investment menus offered by DC pension plans in the United States.


Søren Leth-Petersen, University of Copenhagen

“Is there a housing wealth effect? The effect of subjective unanticipated home price changes on spending”

In this paper we examine whether there is a housing wealth effect. To do this we use longitudinal survey data with subjective information about current and expected future house prices to calculate unanticipated house price changes. We link this information at the person level to high quality administrative records with information about savings in various financial instruments. We find a marginal propensity to consume out of unanticipated housing wealth gains to be 3-5 percent. This spending increase is followed by a corresponding drop in the following year suggesting that the effect is driven by spending on durable goods. Using administrative records from a tax subsidy for home improvements and maintenance expenses this is confirmed. The positive MPC out of unanticipated housing wealth is driven by about 7 percent of the respondents who actively refinance their mortgage loan and extract equity to finance the spending increase. We find that these respondents have a high Loan-to-Value (LTV) ratio and are relatively young. The results thus suggest that the housing wealth effect operates through increased access to collateral.


Hans Fehr, University of Würzburg

“Home ownership and retirement - Why is it connected and what are the implications for public policy?”

The fact that households typically hold substantial assets throughout retirement until death has been documented in many studies. This retention of wealth among the elderly stands in stark contrast to the (perceived) inadequate savings of younger households. Therefore a large body of literature tries to explain this so-called "retirement savings puzzle". Whereas in the past mostly bequest motives and precautionary savings to cover uncertain health expenditures have been brought forward, some recent literature highlights the role of housing equity in old age savings. Housing is very specific since it serves a dual purpose as a consumption good and as an asset. In addition, it may be used as an implicit insurance vehicle to buffer health shocks and long-term-care risk. The latter might explain at least partially the low demand for private long-term-care insurance in some countries. We will illustrate this link between tenure choice, health care risks and insurance coverage in retirement in a stylized life cycle model and then discuss the policy conclusions which can be drawn from such an analysis.

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