Q, investment, and the financial cycle

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Title: Q, investment, and the financial cycle
Author: Verona, Fabio
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 26/2017
Year of publication: 2017
Publication date: 2.9.2017
Published in: Pulished in Oxford Bulletin of Economics and Statistics as "Investment, Tobin’s Q, and cash flow across time and frequencies" 2019 ; 82 ; 2 ; 331-346 ; https://doi.org/10.1111/obes.12321
Pages: 53
Subject (yso): investoinnit
Keywords: suhdanteet; rahoitussyklit
JEL: C49; E22; G31
Other keywords: Tobin’s Q; investment; financial cycle; time-frequency estimation; continuous wavelets
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.
Rights: https://helda.helsinki.fi/bof/copyright

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