What Drives Marginal Q Fluctuations?

60 Pages Posted: 24 Mar 2017 Last revised: 11 Feb 2021

See all articles by Ilan Cooper

Ilan Cooper

BI Norwegian Business School

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Chunyu Yang

BI Norwegian Business School

Date Written: February 10, 2021

Abstract

Sharp swings in the shadow value of capital (marginal Q) characterize business cycle fluctuations. An important question is whether marginal Q fluctuates due to revisions in expected marginal profits or discount rates, and by how much of each. We infer marginal Q from the marginal cost of investment, derive a present-value relation, and conduct a VAR-based variance decomposition for marginal Q. We find that the bulk of fluctuations in marginal Q stems from expected investment return (discount rate) shocks. Yet, expected marginal profit shocks play a non-negligible role. Additionally, the entire variation of investment stems from discount rate shocks.

Keywords: Tobin's Q; Present-value model; Investment return; Variance decomposition; VAR implied predictability; Aggregation bias; Marginal profit of capital; Long-horizon regressions

JEL Classification: E22; E27; G10; G12; G17; G31

Suggested Citation

Cooper, Ilan and Maio, Paulo F. and Yang, Chunyu, What Drives Marginal Q Fluctuations? (February 10, 2021). Available at SSRN: https://ssrn.com/abstract=2940214 or http://dx.doi.org/10.2139/ssrn.2940214

Ilan Cooper (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

Chunyu Yang

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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