Accounting-Based Valuation and Changing Interest Rates
35 Pages Posted: 10 Jul 2002
Date Written: April 26, 2002
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
JEL Classification: M41, G12
Suggested Citation: Suggested Citation