Are Net Discount Rates Stationary?: The Implications for Present Value Calculations: Comment

This comment reexamines the time series properties of the net discount ratio over the period 1964 through 1989. Using the standard augmented Dickey-Fuller tests, we fail to reject the null hypothesis of a unit root in the net discount ratio. Using a modification of this test that takes into account...

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Bibliographic Details
Published inThe Journal of risk and insurance Vol. 61; no. 3; pp. 503 - 512
Main Authors Gamber, Edward N., Sorensen, Robert L.
Format Journal Article
LanguageEnglish
Published Malvern American Risk and Insurance Association 01.09.1994
Blackwell Publishing Ltd
Subjects
Critical values
Discount rates
Economic trends
Hypotheses
Insurance rates
Notes and Communications
Null hypothesis
Present value
Ratio analysis
Ratios
Root test
Statistical data
Statistical forecasts
Time series
Time series forecasting
United States > US
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Summary:This comment reexamines the time series properties of the net discount ratio over the period 1964 through 1989. Using the standard augmented Dickey-Fuller tests, we fail to reject the null hypothesis of a unit root in the net discount ratio. Using a modification of this test that takes into account a possible one-time shift in the series mean, we reject the unit root hypothesis. Thus, we conclude that the net discount ratio is nonstationary, but the source of nonstationarity is a one-time shift that occurred between October 1979 and January 1980. The implications of this mean shift for forecasting the present value of future earnings are examined.
ISSN:0022-4367
1539-6975
DOI:10.2307/253573