Accounting-Based Valuation and Changing Interest Rates

35 Pages Posted: 8 Oct 2008

See all articles by Dan Gode

Dan Gode

affiliation not provided to SSRN

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: June 2002

Abstract

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.

Keywords: Stochastic Interest Rates, Valuation, Ohlson Model, Random Walk Model of Earnings, Permanent Earnings

Suggested Citation

Gode, Dan and Ohlson, James A., Accounting-Based Valuation and Changing Interest Rates (June 2002). NYU Working Paper No. DHANANJAY (DAN) K. GODE-05. Available at SSRN: https://ssrn.com/abstract=1280703

Dan Gode (Contact Author)

affiliation not provided to SSRN

No Address Available

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

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