Gueorgui I. Kolev

The Ombudsman: The Wicked Environment of CEO Pay

We applaud Jacquart and Armstrongs systematic, evidence-based review of the contentious issue of CEO remuneration. We augment their analysis. First, we highlight the lack of demonstrated validity of unaided expert judgment to set CEO remuneration. The settings in which such judgments are made do not facilitate learning through experience and are subject to many biases. In particular, we briefly describe our empirical study that demonstrates illusory correlation in the form of a relationship between golfing ability and CEO remuneration, which does not mirror CEO performance. Second, we provide an analysis of data that shows that boards of directors are unable to accurately predict future performance of CEOs when determining remuneration packages. Third, we advocate the use of systematic methods in setting CEO remuneration.

Forecasting Aggregate Stock Returns Using the Number of Initial Public Offerings as a Predictor

Large number of Initial Public Offerings (IPOs) reliably predicts subsequent low equally weighted aggregate stock returns and the return differential between small and big firms, both in-sample and out-of-sample. The forecasting patterns are consistent with a behavioral story featuring investor sentiment and limits to arbitrage.

Out-of-Sample Equity Premium Predictability and Sample Split Invariant Inference

For a comprehensive set of 21 equity premium predictors we find extreme variation in out-of-sample predictability results depending on the choice of the sample split date. To resolve this issue we propose reporting in graphical form the out-of-sample predictability criteria for every possible sample split, and two out-of-sample tests that are invariant to the sample split choice. We provide Monte Carlo evidence that our bootstrap-based inference is valid. The in-sample, and the sample split invariant out-of-sample mean and maximum tests that we propose, are in broad agreement. Finally we demonstrate how one can construct sample split invariant out-of-sample predictability tests that simultaneously control for data mining across many variables.

What Generates the Equity Premium Puzzle: Bad Model or Bad Data?

Correlations of monthly, quarterly and annual consumption growth rates, calculated from novel weekly Gallup consumption data, with the equity premium are high – 13%, 44% and 54% at monthly, quarterly and yearly frequency. The power utility consumption CAPM prices the sample average annual equity premium of 4.9%, with estimated relative risk aversion parameters of 2.41, 0.96 and 1.04 at the monthly, quarterly and annual frequency. I can reject at 95% level of confidence relative risk aversion parameter larger than 13.62, 5.18 and 5.36 at the monthly, quarterly and annual frequency. My results suggest that the equity premium puzzle is an artifact arising from bad data, not from a bad model.

Two Gold Return Puzzles

Since the dismantling of the Bretton Woods system, gold has delivered average return comparable to the average return delivered by the aggregate US stock market. This suggests that none of the growth and technological improvement gains accrued to the financiers. In the context of modern asset pricing models, say the CAPM model or the Fama-French three factor model, gold is a risk free asset, as it has no covariation with the risk factors. The large average gold return is a Jensens alpha not explained by covariation with what modern asset pricing models consider risk factors, i.e., the market, the growth, and the small firms risk factors.

Quantitative Easing Engineered by the FED, and Prices of Internationally Traded and Dollar Denominated Commodities and Precious Metals

I study the impact of quantitative easing by the FED on the prices of internationally traded and dollar denominated commodities (oil) and precious metals (gold, silver, platinum and palladium). Finite distributed lag models suggest that the long run multipliers in regressions of the log of precious metals or commodities prices on the log of the US monetary base is about one, i.e., a permanent one percent increase in the US monetary base results in one percent increase in the prices of these commodities and precious metals. In other words, the quantitative easing actions by the FED are purely inflationary as predicted by classical economic theory. I also present an event study of the quantitative easing announcement effects on prices, and these are small for precious metals and negative for oil. Overall this study suggests certain dissonance between the price behavior on one hand in the bond market, and on the other in the commodities and precious metals markets. It also suggests that taking the US CPI reported by the Bureau of Labor Statistics to be identical with the concept of inflation can be quite misleading. Further research is needed to determine why the implied inflation in the US CPI and the US government debt market is so different from the implied inflation in the US dollar denominated and internationally traded commodities and precious metals.