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

Lucy Chong, Chin-Hong Puah and Abu Hassan Md Isa

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Rational Expectations; Financial Sector; Gross Revenue; Capital Expenditure (search for similar items in EconPapers)
JEL-codes: C12 C22 D84 G20 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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