On the Revaluation of Arbitraged Assets and the Inflation Accounting Debate: Some Error Correction Estimates and Forecasts

Posted: 21 Apr 1999

See all articles by David Butler

David Butler

Cardiff University - Cardiff Business School

Mahmoud Ezzamel

Cardiff Business School - Accounting and Finance Section

William Forbes

Loughborough University - Business School

Abstract

This paper recasts an old debate in accounting, that of the appropriate means of revaluing assets in place, within a new theoretical and empirical framework. The new theoretical framework is to regard the current movement of current cost accounting indices as reflecting inter-industry arbitrage of both assets in place and investment. This new perspective results in a new empirical development which draws upon recent advances in time-series econometrics, namely, error correction representations of the trajectory of related time-series. We construct error correction representations of both the current-cost and the current purchasing power method of valuing assets in place and compare them according to their ability to forecast the future value of assets in place. The results suggest that the time path of specific price indices has a parsimonious error-correction representation involving other related price indices. The bivariate and multivariate tests of forecasting accuracy we conducted show that the error correction model clearly outperforms the random walk benchmark model.

JEL Classification: M41, C53

Suggested Citation

Butler, David and Ezzamel, Mahmoud and Forbes, William Patrick, On the Revaluation of Arbitraged Assets and the Inflation Accounting Debate: Some Error Correction Estimates and Forecasts. Available at SSRN: https://ssrn.com/abstract=161520

David Butler

Cardiff University - Cardiff Business School

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

Mahmoud Ezzamel (Contact Author)

Cardiff Business School - Accounting and Finance Section ( email )

Colum Drive
Cardiff CF10 3EU
United Kingdom
+44 (0) 29 2087 4277 (Phone)
+44 (0) 29 2087 4419 (Fax)

William Patrick Forbes

Loughborough University - Business School ( email )

Ashby Road
Loughborough
Nottingham NG1 4BU, LE11 3TU
Great Britain

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