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Investment dynamics and forecast: Mind the frequency

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  • Kilponen, Juha
  • Verona, Fabio

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.

Suggested Citation

  • Kilponen, Juha & Verona, Fabio, 2022. "Investment dynamics and forecast: Mind the frequency," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s1544612322003051
    DOI: 10.1016/j.frl.2022.103075
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    References listed on IDEAS

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    Cited by:

    1. Dück, Alexander & Verona, Fabio, 2023. "Robust frequency-based monetary policy rules," IMFS Working Paper Series 180, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    2. Dück, Alexander & Verona, Fabio, 2023. "Monetary policy rules: model uncertainty meets design limits," Bank of Finland Research Discussion Papers 12/2023, Bank of Finland.

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    More about this item

    Keywords

    Investment; Equity Q; Cash flow; Bond Q; Frequency domain; Out-of-sample forecast;
    All these keywords.

    JEL classification:

    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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