Title

Time-Series Properties of Capitalization Rates

Document Type

Article

Journal/Book Title/Conference

Litigation Economics Review

Volume

5

Issue

2

Publication Date

2001

First Page

27

Last Page

31

Abstract

Applying the discounted cash flow method in valuing a business requires a capitalization rate which, approximately, is the difference between a discount rate and a growth rate in net cash flows. Capitalization rates are analogous to the net discount rate concept familiar to most forensic economists. This paper tests the reasonableness of using historical mean capitalization rates as forecasts of future rates by evaluating the time series properties of various capitalization rates constructed from both micro-and macroeconomic data. Based on this analysis, it is con-cluded that, in general, capitalization rates are covariance stationary. Therefore, historical long-run mean capitalization rates may provide rea-sonable estimates of future rates.

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