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The Role of Volatility in Forecasting

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  • Bernadette A. Minton

  • Catherine M. Schrand

  • Beverly R. Walther

Abstract

Theories of underinvestment propose a link between cash flow volatility and investment and subsequent cash flow and earnings levels. Consistent with these theories, our results indicate that forecasting models that include volatility as an explanatory variable have greater accuracy and lower bias than forecasting models that exclude volatility. The improvement in forecast accuracy and bias is greatest when the firm is most likely to experience underinvestment. The profitable implementation of a trading strategy based on these findings, however, suggests that equity market participants do not incorporate fully the information in historical volatility when forecasting future firm performance.

Suggested Citation

  • Bernadette A. Minton & Catherine M. Schrand & Beverly R. Walther, 2002. "The Role of Volatility in Forecasting," Review of Accounting Studies, Springer, vol. 7(2), pages 195-215, June.
    • Handle: RePEc:spr:reaccs:v:7:y:2002:i:2:d:10.1023_a:1020226118973
    DOI: 10.1023/A:1020226118973
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    Cited by:

    1. Dain C. Donelson & Robert J. Resutek, 2015. "The predictive qualities of earnings volatility and earnings uncertainty," Review of Accounting Studies, Springer, vol. 20(1), pages 470-500, March.
    2. Gopal V. Krishnan & Bin Srinidhi & Lixin (Nancy) Su, 2008. "Inventory policy, accruals quality and information risk," Review of Accounting Studies, Springer, vol. 13(2), pages 369-410, September.
    3. Alessandra Allini & Marco Maffei & Rosalinda Santonastaso & Flavio Spagnuolo, 2025. "Hedge accounting usage and capital investment: European evidence under IFRS requirements," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 29(2), pages 319-353, June.

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