Tail-Heaviness, Asymmetry, and Profitability Forecasting by Quantile Regression

67 Pages Posted: 27 Jul 2017 Last revised: 10 Dec 2020

See all articles by Hui Tian

Hui Tian

Tsinghua University - PBC School of Finance; University of Bath - School of Management

Andrew Yim

Cass Business School, City, University of London

David Newton

University of Bath - School of Management

Date Written: May 5, 2020

Abstract

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

Suggested Citation

Tian, Hui and Yim, Andrew and Newton, David, Tail-Heaviness, Asymmetry, and Profitability Forecasting by Quantile Regression (May 5, 2020). Management Science, https://doi.org/10.1287/mnsc.2020.3694, Available at SSRN: https://ssrn.com/abstract=3008666 or http://dx.doi.org/10.2139/ssrn.3008666

Hui Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Andrew Yim (Contact Author)

Cass Business School, City, University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

HOME PAGE: http://www.cass.city.ac.uk/faculties-and-research/experts/andrew-yim

David Newton

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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