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Theory of rational expectations hypothesis: banks and other financial institutions in Malaysia

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  • Chong, Lucy Lee-Yun
  • Puah, Chin-Hong
  • Md Isa, Abu Hassan

Abstract

The Rational Expectations Hypothesis (REH) states that the actual outcome will be identical to the optimal forecast when all obtainable information had been utilized in forming the expectations. This study intends to empirically examine the existence of rational behavior in the banks and other financial institutions in Malaysia from the perspective of how the decision-makers formed their gross revenue (GR) and capital expenditure (CE) forecasts. Survey data provided by the Business Expectations Survey of Limited Companies was utilized to conduct a series of rationality tests including unbiasedness, non-serially correlated and efficiency tests. Empirical evidence shows that GR is unbiased, serially uncorrelated and efficient, nevertheless, CE fails to pass any of the tests. Therefore, GR is deemed as a rational predictor to the actual value but not in the case of CE.

Suggested Citation

  • Chong, Lucy Lee-Yun & Puah, Chin-Hong & Md Isa, Abu Hassan, 2012. "Theory of rational expectations hypothesis: banks and other financial institutions in Malaysia," MPRA Paper 36657, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:36657
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    References listed on IDEAS

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    1. Pesaran, M. Hashem & Weale, Martin, 2006. "Survey Expectations," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 1, chapter 14, pages 715-776, Elsevier.
    2. Muzafar Shah HABIBULLAH*, 1997. "FORECASTING ECONOMIC VARIABLES IN THE AGRICULTURAL SECTOR: Testing the Rational Expectations Hypothesis on Survey Data," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 13(1), pages 171-184.
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    11. Wong, Shirly Siew-Ling & Puah, Chin-Hong & Shazali, Abu Mansor, 2011. "Survey Evidence on the Rationality of Business Expectations: Implications from the Malaysian Agricultural Sector," MPRA Paper 36661, University Library of Munich, Germany.
    12. Puah, Chin-Hong & Chong, Lucy Lee-Yun & Jais, Mohamad, 2011. "Testing the Rational Expectations Hypothesis on the Retail Trade Sector Using Survey Data from Malaysia," MPRA Paper 36699, University Library of Munich, Germany.
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    Cited by:

    1. Puah, Chin-Hong & Wong, Shirly Siew-Ling & Habibullah, Muzafar Shah, 2012. "Rationality of business operational forecasts: evidence from Malaysian distributive trade sector," MPRA Paper 37599, University Library of Munich, Germany.

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    More about this item

    Keywords

    Rational Expectations; Financial Sector; Gross Revenue; Capital Expenditure;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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