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A nonlinear dynamic approach to cash flow forecasting

Author

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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)

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.

Suggested Citation

  • Yang Pang & Shimeng Shi & Yukun Shi & Yang Zhao, 2022. "A nonlinear dynamic approach to cash flow forecasting," Review of Quantitative Finance and Accounting, Springer, vol. 59(1), pages 205-237, July.
    • Handle: RePEc:kap:rqfnac:v:59:y:2022:i:1:d:10.1007_s11156-022-01066-8
    DOI: 10.1007/s11156-022-01066-8
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    Cited by:

    1. Eichfelder, Sebastian & Jacob, Martin & Schneider, Kerstin, 2023. "Do tax incentives affect investment quality?," Journal of Corporate Finance, Elsevier, vol. 80(C).

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    More about this item

    Keywords

    Cash flow growth; Cash flow prediction; Grey-box model; Panel data model;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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