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Q, investment, and the financial cycle

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  • Verona, Fabio

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.

Suggested Citation

  • Verona, Fabio, 2017. "Q, investment, and the financial cycle," Bank of Finland Research Discussion Papers 26/2017, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2017_026
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    References listed on IDEAS

    as
    1. Kilponen, Juha & Verona, Fabio, 2016. "Testing the Q theory of investment in the frequency domain," Bank of Finland Research Discussion Papers 32/2016, Bank of Finland.
    2. Jud, G Donald & Winkler, Daniel T, 2003. "The Q Theory of Housing Investment," The Journal of Real Estate Finance and Economics, Springer, vol. 27(3), pages 379-392, November.
    3. Peters, Ryan H. & Taylor, Lucian A., 2017. "Intangible capital and the investment-q relation," Journal of Financial Economics, Elsevier, vol. 123(2), pages 251-272.
    4. repec:zbw:bofrdp:2016_032 is not listed on IDEAS
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    More about this item

    JEL classification:

    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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