A nonlinear dynamic approach to cash flow forecasting

Yang Pang (), Shimeng Shi (), Yukun Shi () and Yang Zhao ()
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Yang Pang: China Investment Corporation
Shimeng Shi: Xi’an Jiaotong-Liverpool University
Yukun Shi: University of Glasgow
Yang Zhao: Central University of Finance and Economics

Review of Quantitative Finance and Accounting, 2022, vol. 59, issue 1, No 7, 205-237

Abstract: Abstract We propose a novel grey-box model to capture the nonlinearity and the dynamics of cash flow model parameters. The grey-box model retains a simple white-box model structure, while their parameters are modelled as a black-box with a Padé approximant as a functional form. The growth rate of sales and firm age are used as exogenous variables because they are considered to have explanatory power for the parameter process. Panel data estimation methods are applied to investigate whether they outperform the pooled regression, which is widely used in the extant literature. We use the U.S. dataset to evaluate the performance of various models in predicting cash flow. Two performance measures are selected to compare the out-of-sample predictive power of the models. The results suggest that the proposed grey-box model can offer superior performance, especially in multi-period-ahead predictions.

Keywords: Cash flow growth; Cash flow prediction; Grey-box model; Panel data model (search for similar items in EconPapers)
JEL-codes: C14 C33 C53 M41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-022-01066-8

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