Testing the Q theory of investment in the frequency domain
Juha Kilponen () and
Fabio Verona ()
CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto
We revisit the empirical performance of the Q theory of investment, explicitly taking into account the frequency dependence of investment, Tobin’s Q, and cash flow. The time series are decomposed into orthogonal components of different frequencies using wavelet multiresolution analysis. We find that the Q theory fits the data much better than might be expected (both in-sample and out-of-sample) when the frequency relationship between the variables is taken into account. Merging the wavelet approach and proxies for Q recently suggested in the investment literature also significantly improves the quality of short-term forecasts.
Keywords: investment; Tobin’s Q; bond Q; intangible Q; intangible investment; cash flow; discrete wavelets; frequency estimation; forecast (search for similar items in EconPapers)
JEL-codes: C49 E22 G31 (search for similar items in EconPapers)
Pages: 27 pages
New Economics Papers: this item is included in nep-mac
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Working Paper: Testing the Q theory of investment in the frequency domain (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:por:cetedp:1701
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