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A test of the present value model of stock prices under rational and adaptive expectations using Bursa Malaysia data from 1983 to 2003

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  • Nicky Yeong
  • Chong Mun Ho
  • Brian Dollery
  • Mori Kogid

Abstract

The rational expectations model has been the central expectations hypothesis used by economists while the adaptive expectations hypothesis has been considered by many as inefficient because expectations cannot fully exploit all available information. The aim of this study is to determine which of these two expectations formation hypotheses best explains the behaviour of investors in the Malaysian stock market. We employ the Chow (1988) methodology in which the two expectations hypotheses are applied to the present value model of stock prices for Malaysian stock market data consisting of stock prices and dividends for 13 companies over 21 years. Our results provide strong statistical support for the adaptive expectations hypothesis. This finding is in line with the empirical findings of Chow and his collaborators.

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  • Nicky Yeong & Chong Mun Ho & Brian Dollery & Mori Kogid, 2010. "A test of the present value model of stock prices under rational and adaptive expectations using Bursa Malaysia data from 1983 to 2003," Applied Economics Letters, Taylor & Francis Journals, vol. 17(18), pages 1835-1839.
    • Handle: RePEc:taf:apeclt:v:17:y:2010:i:18:p:1835-1839
    DOI: 10.1080/13504850903317354
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    References listed on IDEAS

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    1. West, Kenneth D, 1988. "Dividend Innovations and Stock Price Volatility," Econometrica, Econometric Society, vol. 56(1), pages 37-61, January.
    2. Chow, Gregory C. & Fan, Zhao-zhi & Hu, Jin-yan, 1999. "Shanghai Stock Prices as Determined by the Present-Value Model," Journal of Comparative Economics, Elsevier, vol. 27(3), pages 553-561, September.
    3. Foroni, Ilaria & Gardini, Laura & Rosser, J.Barkley, 2003. "Adaptive and statistical expectations in a renewable resource market," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 63(6), pages 541-567.
    4. Kivilcim Metin & Ilker Muslu, 1999. "Money demand, the Cagan model, testing rational expectations vs adaptive expectations: The case of Turkey," Empirical Economics, Springer, vol. 24(3), pages 415-426.
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    Cited by:

    1. Jasman Tuyon & Zamri Ahmada, 2016. "Behavioural finance perspectives on Malaysian stock market efficiency," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 16(1), pages 43-61, March.

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