It’s a long way to the top (if you wanna rock ‘n’ roll)

Yes, it’s a long way to the top, especially if you want to publish your first paper in a journal ranked in the first quartile of Economics. But, after a year of hard work, good news arrived at the end of 2016. The International Journal of Forecasting decided that my first paper, Empowering cash managers to achieve cost savings by improving predictive accuracy, deserved publication. It has been a long way to the top, but I wanted rock ‘n’ roll. At several moments of the process of writing, submission and revision, I really thought that I was on a highway to hell.

The underlying idea of the paper was simple: if predictive accuracy is a good thing, then cost savings in cash management must be correlated with better forecasts.  Even though the idea was simple, the process to reformulate the idea as a convincing message was not so easy. After providing the necessary background about the cash management problem, we introduced the main characteristics of the cash flow data sets used in the experiments. Then, we proposed five different forecasters for comparative purposes: autoregressive, linear regression, radial basis functions, random forests and a seasonal interaction model (the latter suggested by a reviewer).  As an evaluation algorithm we relied on a time-series cross validation procedure by Hyndman and the winners were… random forests (for data set 1) and linear regression (for data set 2).

The crucial question came next: do better forecasts produce better cash management policies?  We expected so, but we had to show it empirically. To this end, we implemented a recent cash management model presented in the literature that used cash flow forecasts as a key input. We tested a wide range of cash flow forecasts with different accuracies that resulted in a thunderstruck  or, in other words, in an empirical confirmation of the savings hypothesis: better forecasts produce better cash management policies in terms of cost.  As a final contribution, we proposed a general methodology to help cash managers estimate whether their efforts in improving the predictive accuracy are rewarded by proportional cost savings.

The work was done and we had no other thing to do than waiting for the good news (if any). The e-mail confirmation arrived at the end of 2016 and I felt like if  you shook me all night long.

Thanks to AC/DC for providing the appropriate songs to illustrate my thoughts.

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