Investment dynamics and forecast: Mind the frequency
Kilponen, Juha; Verona, Fabio (28.06.2022)
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Volyymi
49Numero
October ; 2022
2022
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-202109131518Tiivistelmä
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.