We then use these idiosyncratic returns to estimate CEO portfolio variances, incentive ratios, percentage change in total compensation, and variance ratios, and re-estimate the results in Tables 2, 3, and 4.
The first column shows that the median CEO receives very few incentives from variation in his cash pay relative to the variation in his portfolio, and that cash pay variance is small relative to portfolio variance for most CEOs.
To address this concern, we re-estimate the regressions in Columns (1) and (2) using as the dependent variable the ratio of total pay variance to total portfolio variance summarized in Column (2) of Panel A of Table 2.
In Column (4), we estimate the relation between the inverse of CEOs' equity portfolio variance and return variance.
However, Column (5) shows that we obtain the same results on a smaller sample when we examine the determinants of the inverse of CEOs' portfolio variance.
Table 3: Portfolio Variances of Low versus High Exposure Portfolios relative to Benchmark (1) (2) (3) (4) (5) In-sample B L (L-B/B) H (H-B/B) Global Portfolios global 19.
It gives the average portfolio variance as the number of stocks in a given portfolio increases from one to forty, expressed as a percentage of the average variance of all individual stocks in our sample.
Out-of-sample comparisons of portfolio variances indicate that the error correction hedging model outperforms the conventional method, with improvements averaging about 2%.
To formally compare the performance of each kind of hedge, we follow the procedure adopted in Kroner and Sultan (1993) by evaluating the following in-sample portfolio variance
Comparisons of In-Sample Hedging Effectiveness using Portfolio Variance Conventional Model Error Correction Model Interval ([10.
3) Figure 2 is constructed using portfolio variances for the full sample period and thus captures the average importance of region versus within-region country effects over time.
It gives the average portfolio variance as the number of stocks in a portfolio increases from 1 to 40, as a percentage of the average variance of all individual stocks.