Accounting-Based Valuation and Changing Interest Rates
affiliation not provided to SSRN
James A. Ohlson
New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Accounting, Taxation & Business Law
NYU Working Paper No. 2451/27482
We generalize Ohlson's (1995) model to stochastic interest rates while making no specific assumptions about the stochastic process of interest rates. Our analysis of the case when earnings suffice for valuation yields three insights. (1) In the valuation function, the multiplier for forthcoming earnings depends on the current rate, but the multiplier for current earnings depends on the lagged rate. (2) In the residual earnings dynamic, the persistence of residual earnings increases in the current rate and decreases in the lagged rate. (3) In the earnings dynamic, the traditional random walk requires an additional term, current earnings multiplied by the percentage change in interest rates.
Number of Pages in PDF File: 35
Keywords: Stochastic Interest Rates, Valuation, Ohlson Model, Random Walk Model of Earnings, Permanent Earningsworking papers series
Date posted: October 8, 2008
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