Download this Paper Open PDF in Browser

Testing the Q Theory of Investment in the Frequency Domain

32 Pages Posted: 14 Feb 2017  

Juha Kilponen

Bank of Finland - Research

Fabio Verona

Bank of Finland - Research

Date Written: December 20, 2016

Abstract

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

JEL Classification: C49, E22, G31

Suggested Citation

Kilponen, Juha and Verona, Fabio, Testing the Q Theory of Investment in the Frequency Domain (December 20, 2016). Bank of Finland Research Discussion Paper No. 32/2016. Available at SSRN: https://ssrn.com/abstract=2914025

Juha Kilponen (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

Fabio Verona

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

HOME PAGE: http://bofcris.solenovo.fi/crisyp/disp/_/en/cr_redir_all/fet/fet/sea?direction=3&id=3827426

Paper statistics

Downloads
40
Abstract Views
158