Investment, Tobin's Q, and Cash Flow Across Time and Frequencies

Abstract

The investment literature has long acknowledged the time‐ and frequency‐varying dynamics of the relationship between investment, Tobin's Q and cash flow. In this paper, we use continuous wavelet tools to estimate and assess the relationship between these variables simultaneously at different frequencies and over time. We find that (i) Q and cash flow are complementary sources of information for investment, the former being more important for firms’ investment decisions in the medium‐to‐long run and the latter at business cycles frequencies; and (ii) investment‐Q sensitivity declines over time at all frequencies, while investment–cash flow sensitivity declines at business cycles frequencies but remains largely stable over the medium‐to‐long run.

Inflation Dynamics and Forecast: Frequency Matters

“…5 See Verona (2020) for a description of the advantages of wavelet lters over other band-pass ltering techniques.…”

Forecasting Inflation with the New Keynesian Phillips Curve: Frequency Matters

“…Ination expectations are the median expected changes in prices on average during the next 12 months reported by households in the Michigan survey of consumers (MSC). The unemployment gap is 4 See Verona (2020) for a description of the advantages of wavelet lters over other band-pass ltering techniques.…”

Frequency-Domain Information for Active Portfolio Management

“…Here, we perform our wavelet decomposition analysis using the Haar wavelet lter Besides its simplicity and wide use, the Haar lter makes a neat connection to temporal aggregation as the wavelet coecients are simply dierences of moving averages (see Bandi, Perron, Tamoni, andTebaldi, 2019 andLubik, Matthes, andVerona, 2019).…”

“…Recent papers using the MODWT MRA decomposition areBekiros and Marcellino (2013),Gallegati and Ramsey (2013),Barunik and Vacha (2015),Crowley and Hughes Hallett (2015),Berger (2016), andFaria and Verona (2018), among others. SeeVerona (2019) for a description of the advantages of wavelet lters over other band-pass ltering techniques.3 As regards the choice of J, the number of observations dictates the maximum number of frequency bands that can be used. In particular, if t 0 is the number of observations in the in-sample period, then J has to satisfy the constraint J ≤ log 2 t 0 .…”