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


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


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

    1. Pesaran, M. Hashem & Weale, Martin, 2006. "Survey Expectations," Handbook of Economic Forecasting, Elsevier.
    2. 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.
    3. 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.
    4. repec:pje:journl:article1997sumiii is not listed on IDEAS
    5. W A Razzak, 1997. "Testing the rationality of the National Bank of New Zealand's survey data," Reserve Bank of New Zealand Discussion Paper Series G97/5, Reserve Bank of New Zealand.
    6. Henzel, Steffen & Wollmershäuser, Timo, 2008. "The New Keynesian Phillips curve and the role of expectations: Evidence from the CESifo World Economic Survey," Economic Modelling, Elsevier, vol. 25(5), pages 811-832, September.
    7. Lehmann, Bruce N., 2009. "The role of beliefs in inference for rational expectations models," Journal of Econometrics, Elsevier, vol. 150(2), pages 322-331, June.
    8. Ashiya, Masahiro, 2003. "Testing the rationality of Japanese GDP forecasts: the sign of forecast revision matters," Journal of Economic Behavior & Organization, Elsevier, vol. 50(2), pages 263-269, February.
    9. Aggarwal, Raj & Mohanty, Sunil, 2000. "Rationality of Japanese macroeconomic survey forecasts: empirical evidence and comparisons with the US," Japan and the World Economy, Elsevier, vol. 12(1), pages 21-31, January.
    10. E. Douglas Beach & Jorge Fernandez-Cornej & Noel D. Uri, 1995. "Testing the rational expectations hypothesis using survey data from vegetable growers in the USA," Journal of Economic Studies, Emerald Group Publishing, vol. 22(6), pages 46-59, October.
    11. G. C. Lim & C. R. McKenzie, 1998. "Testing the rationality of expectations in the Australian foreign exchange market using survey data with missing observations," Applied Financial Economics, Taylor & Francis Journals, vol. 8(2), pages 181-190.
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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.

    More about this item


    Rational Expectations; Financial Sector; Gross Revenue; Capital Expenditure;

    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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