Valuation, Linear Information Dynamic, and Stochastic Discount Rates

21 Pages Posted: 12 Apr 2000

See all articles by Dhananjay (Dan) K. Gode

Dhananjay (Dan) K. Gode

New York University (NYU) - Department of Accounting

James A. Ohlson

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: March 2000

Abstract

We generalize Ohlson (1995) to stochastic interest rates. Our analysis provides four insights. First, the earnings capitalization multiple depends on the lagged rate, not the current rate. Second, the abnormal earnings persistence parameter increases in the current rate and decreases in the lagged rate. Third, it is not necessary to specify the stochastic process underlying interest rates to relate stock prices and accounting numbers. Finally, only the lagged rate is needed to capitalize current earnings to determine current stock price, while both the lagged and current rates are needed to forecast next-period earnings based on current earnings.

JEL Classification: G12, G14, M41

Suggested Citation

Gode, Dhananjay (Dan) K. and Ohlson, James A., Valuation, Linear Information Dynamic, and Stochastic Discount Rates (March 2000). Available at SSRN: https://ssrn.com/abstract=219208 or http://dx.doi.org/10.2139/ssrn.219208

Dhananjay (Dan) K. Gode (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States
212-998-0021 (Phone)
212-995-4004 (Fax)

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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