Category: Modeling

Predict, Not Extrapolate.

Why 3-Statement Forecasting is not Enough

By Jack Xu In the previous article, I discussed what constitutes a model for the purpose of forecasting the future values of a variable. A model specifies the cause that changes the values of that variable. A forecast that simply assigns the future values based on prior experiences is not a model. In this article…
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Financial Modelling: What is NOT modelling?

By Jack Xu What is NOT modeling When modeling for real-world applications, we almost always deal with the time series of a variable. For example, with revenue, we are interested in the values of revenue over a period of forecasting horizon, such as four quarters each year for the next 5 years. That is a…
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Why cannot financial analysts alone raise the power of their forecasting model to the next level, yet?

Making a financial model more predictive than extrapolative is conceptually simple – model more the causes than the results. However, it is much more difficult than to conceptualize, in fact far outside the trained skill set of most financial analysts without a powerful tool, to simulate the actions of a company that produce the financial…
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Challenges in financial forecasting for credit and equity analysts

What makes a financial model more predictive than descriptive? When a model’s inputs are related more to the causes than to the results of the process being modeled, the model is more predictive and less descriptive than otherwise. Challenges facing credit and equity analysts With the currently available financial modelling tools, analysts often have to…
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