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Q, Investment, and the Financial Cycle

53 Pages Posted: 6 Sep 2017 Last revised: 3 Dec 2017

Fabio Verona

Bank of Finland - Research

Date Written: September 2, 2017

Abstract

The empirical performance of the Q theory of investment can be significantly improved by simultaneously considering the time- and the frequency-varying features of the investment-Q relationship. Using continuous wavelet tools, I assess the investment-Q sensitivity at different frequencies and its evolution over time, as well as the interaction of the financial cycle with the Q theory. The results show that there is a positive, stable medium-to-long-run relationship between investment and Q that begins after a positive, stable long-run relationship between credit and Q materializes. In such case, credit leads and slowly fuels the stock price boom.

Keywords: Tobin’s Q, investment, financial cycle, time-frequency estimation, continuous wavelets

JEL Classification: C49, E22, G31

Suggested Citation

Verona, Fabio, Q, Investment, and the Financial Cycle (September 2, 2017). Bank of Finland Research Discussion Paper No. 26/2017. Available at SSRN: https://ssrn.com/abstract=3032373

Fabio Verona (Contact Author)

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

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