Tail-Heaviness, Asymmetry, and Profitability Forecasting by Quantile Regression
67 Pages Posted: 27 Jul 2017 Last revised: 10 Dec 2020
Date Written: May 5, 2020
We show that quantile regression is better than ordinary-least-squares (OLS) regression in forecasting profitability for a range of profitability measures following the conventional setup of the accounting literature, including the mean absolute forecast error (MAFE) evaluation criterion. Moreover, we perform both a simulated-data and an archival-data analysis to examine how the forecasting performance of quantile regression against OLS changes with the shape of the profitability distribution. Considering the MAFE and mean squared forecast error (MSFE) criteria together, quantile regression is more accurate relative to OLS when the profitability to be forecast has a heavier-tailed distribution. In addition, the asymmetry of the profitability distribution has either a U-shape or an inverted-U-shape effect on the forecasting accuracy of quantile regression. An application of the distributional shape analysis framework to cash flows forecasting demonstrates the usefulness of the framework beyond profitability forecasting, providing additional empirical evidence on the positive effect of tail-heaviness and supporting the notion of an inverted-U-shape effect of asymmetry.
Keywords: heavy tails, kurtosis, skewness, distributional shape, profitability forecast, quantile regression
JEL Classification: L25, G17, M21, M41, C53
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