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Forecasting Percentage Growth

Do Your Dependent Variable Transformations for PPNR Stress Testing Make Sense? In PPNR Stress Testing, one of the most common transformations of the dependent variable (DV) is to predict growth in balances, revenue, and expenses from period to period. Implementing this correctly, however, comes with a catch: the preferred transformation is a logarithmic one, i.e., the difference in each period’s log-transformed balance (“diff-log” or Δln), as opposed to percentage change, i.e., balances today divided by balances yesterday (“percent change” or Δ%). In this Perspective we outline why non-statisticians and statisticians alike should prefer a Δln over a Δ% transformation for ...

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