Time-Series Properties of Capitalization Rates
Litigation Economics Review
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.
Bowles, Tyler J., and W. Cris Lewis. “Time-Series Properties of Capitalization Rates.” Litigation Economics Review 5(2, Winter 2001):27-31