The role of volatility in forecasting

Bernadette A. Minton, Catherine M. Schrand*, Beverly R. Walther

*Corresponding author for this work

Research output: Contribution to journalArticle

30 Scopus citations

Abstract

Theories of underinvestment propose a link between cash flow volatility and investment and subsequent cash flow and earnings levels. Consistent with these theories, our results indicate that forecasting models that include volatility as an explanatory variable have greater accuracy and lower bias than forecasting models that exclude volatility. The improvement in forecast accuracy and bias is greatest when the firm is most likely to experience underinvestment. The profitable implementation of a trading strategy based on these findings, however, suggests that equity market participants do not incorporate fully the information in historical volatility when forecasting future firm performance.

Original languageEnglish (US)
Pages (from-to)195-215
Number of pages21
JournalReview of Accounting Studies
Volume7
Issue number2-3
StatePublished - Dec 1 2002

Keywords

  • Cash flow
  • Forecasting
  • Underinvestment
  • Volatility

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)

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    Minton, B. A., Schrand, C. M., & Walther, B. R. (2002). The role of volatility in forecasting. Review of Accounting Studies, 7(2-3), 195-215.