Investment dynamics and forecast: Mind the frequency

Juha Kilponen and Fabio Verona

Finance Research Letters, 2022, vol. 49, issue C

Abstract: We analyze the in-sample fit and the out-of-sample forecast performance of the investment equation using different proxies for Tobin’s Q, controlling for cash flow, and using their frequency-decomposed components. We show that different frequencies of bond Q and cash flow significantly improve the empirical performance (both in-sample and out-of-sample) of the traditional investment equation. The key step is to filter out the noisy frequencies of the predictors and only retain those that have the greatest individual predictive power.

Keywords: Investment; Equity Q; Cash flow; Bond Q; Frequency domain; Out-of-sample forecast (search for similar items in EconPapers)
JEL-codes: C49 E22 G31 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322003051

DOI: 10.1016/j.frl.2022.103075

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