Puah, Chin-Hong and Wong, Shirly Siew-Ling and Habibullah, Muzafar Shah (2012): Rationality of business operational forecasts: evidence from Malaysian distributive trade sector.
Download (2MB) | Preview
The underlying nature of forecast optimization makes the rational expectations hypothesis (REH) a framework that is theoretically consistent with the expectations formation produced by economic agents under well-defined assumptions of unbiased forecasts and efficient utilization of available information. Most of the recent literature on REH testing has favored a direct procedure based on survey data to validate the theoretical soundness of REH. However, the ability of survey materials to reflect the economic agent’s true expectations remains unconvincing, as previous empirical studies on survey-based expectations have offered mixed evidence of forecast rationality. The present study involved an attempt to evaluate the forecast rationality of survey materials from the Malaysian perspective, as empirical evidence from the view of a developing nation is clearly limited. An expectational series on gross revenue and capital expenditure, spanning 1978 through 2007, was subjected to tests of unbiasedness, non-serial correlation, and efficiency to observe whether the business operational forecasts contributed by the distributive trade sector in Malaysia can be accepted as rational forecasts of the actual realized values. We found that both operational variables are being irrationally constructed, suggesting that forecasters in the distributive trade sector are not rational when they formulate business expectations. Thus, business firms in the examined sector are encouraged to incorporate more relevant information into their business operational forecasts to facilitate more accurate and realistic business forecasting.
|Item Type:||MPRA Paper|
|Original Title:||Rationality of business operational forecasts: evidence from Malaysian distributive trade sector|
|Keywords:||Rational Expectations Hypothesis; Rationality tests; Survey Data; Distributive Trade|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations
L - Industrial Organization > L8 - Industry Studies: Services > L81 - Retail and Wholesale Trade ; e-Commerce
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General
C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes
C - Mathematical and Quantitative Methods > C8 - Data Collection and Data Estimation Methodology ; Computer Programs > C83 - Survey Methods ; Sampling Methods
|Depositing User:||Chin-Hong Puah|
|Date Deposited:||24. Mar 2012 07:22|
|Last Modified:||30. Sep 2015 14:57|
Aggarwal, R., & Mohanty, S. (2000). Rationality of Japanese macroeconomic survey forecasts: Empirical evidence and comparisons with the US. Japan and the World Economy, 12(1), 21-31.
Baghestani, H., & Kainian, A.M. (1993). On the rationality of U.S. macroeconomics forecasts: Evidence from a panel of professional forecasters. Applied Economics, 25(7), 869-878.
Beach, E.D., Fernandez-Cornejo, J., & Uri, N.D. (1995). Testing the rational expectations hypothesis using survey data from vegetable growers in the USA. Journal of Economic Studies, 22(6), 46-59.
Chong, L.L.Y, Puah, C.H., & Md Isa, A.H. (2012). Theory of rational expectations hypothesis: Banks and other financial institutions in Malaysia. MPRA Paper No. 36657.
Department of Statistics Malaysia. Business Expectations Survey of Limited Company, various issues. Putrajaya: Department of Statistics Malaysia.
Dias, F., Duarte, C., & Rua, A. (2008). Inflation expectations in the euro area: Are consumer rational? Banco de Portugal, Working Paper 23-2008.
Dickey, D., & Fuller, W. (1979). Distribution of the estimators for autoregressive times series with a unit root. Journal of the American Statistical Association, 74(366), 427-431.
Dickey, D., & Fuller, W. (1981). Likelihood ratio statistic for autoregressive times series with a unit root. Econometrica, 49(4), 1057-1072.
Easley, D., & O′Hara, M. (1991). Order form and information in securities markets. Journal of Finance, 46(4), 905-927.
Egginton, D.M. (1999). Testing the efficiency and reliability of city forecasts. International Journal of Forecasting, 15(1), 57-66.
Engle, R.F., & Granger, C.W.J. (1987). Cointegration and error correction, estimation and testing. Econometrica, 55(2), 251-276.
Evans, G., & Gulamani, R. (1984). Tests for rationality for the Carlson-Parkin inflation expectation data. Oxford Bulletin of Economics and Statistics, 46(1), 1-19.
Fischer, A.M. (1989). Unit roots and survey data. Oxford Bulletin of Economics and Statistics, 51(4), 451-463.
Forsells, M., & Kenny, G. (2002). The rationality of consumers’ inflation expectations: Survey-based evidence for the euro area. European Central Bank, Working Paper, No. 163.
Friedman, D. (1980). Survey evidence on the rationality of interest rate expectations. Journal of Monetary Economics, 6(4), 453-465.
Gao, F., Song, F.M., & Wang, J. (2008). Rational or irrational expectations? Evidence from China’s stock market. Journal of Risk Finance, 9(5), 432-448.
Gertchev, N. (2007). A critique of adaptive and rational expectations. Quarterly Journal Austrian Economics, 10(4), 313-329.
Granger, C.W.J. (1986). Developments in the study of cointegrated economic variables. Oxford Bulletin of Economics and Statistics, 48(3), 213-228.
Habibullah, M.S. (1994a). Do Business firm in developing economy make rational economic forecast? The evidence from Malaysia business expectations survey of limited companies. Asian Economies, 23(4), 73-92.
Habibullah, M.S. (1994b). Are rubber firm’s gross revenue, capital expenditure and employment forecasts rational?-An empirical evidence. Journal of Natural Rubber Research, 9(1), 56-64.
Habibullah, M.S. (1997). Forecasting economic variables in the agricultural sector: Testing rational expectations hypothesis on survey data. Pakistan Journal of Applied Economics, 12(2), 171-184.
Habibullah, M.S. (2001). Rationality of insurance firms’ forecasts: Results of unbiasedness and efficiency tests. Malaysia Management Journal, 5(1&2), 107-117.
Habibullah, M.S. (2003). The Rationality of Economic Forecasts: The cases of rubber oil palm, forestry and mining sector. Agro Ekonomi, X(1), 67-79.
Habibullah, M.S. (2005). Do bankers make rational economic forecasts? The IUP Journal of Bank Management, IV(4), 7-15.
Keane, M.P., & Runkle D.E. (1990). Are economic forecasts rational? Federal Reserve Bank of Minneapolis Quarterly Review, 13(2), Spring, 26-33.
Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan.
Kim, S.J. (1997). Testing the rationality of exchange rate and interest rate expectations: An empirical study of Australian survey-based expectations. Applied Economics, 29(8), 1011-1022.
Kwiatkowski, D., Philips, P., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics, 54(1-3), 159-178.
Lovell, M. (1986). Tests of the rational expectations hypothesis. American Economic Review, 76(1), 110-124.
Lui, S. Mitchell, J., & Weale, M. (2011). The utility of expectational data: Firm-level evidence using matched qualitative-quantitative UK surveys. International Journal of Forecasting, 27(4), 1128-1146.
Mackinnon, J. G. (1996). Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11(6), 601-618.
Madsen, J.B. (1993). The formation of production expectations in manufacturing industry for nine industrialized countries. Empirical Economic, 18(3), 501-521.
Marais, D.J., Smit, E.V.D.M., & Conradie, W.J. (1997). Micro-level tests for rationale expectations in South Africa. South Africa Journal of Business Management, 8(1), 15-27.
Mitchell, K., & Pearce, D.K. (2005). Professional forecasts of interest rates and exchange rates: Evidence from the Wall Street Journal’s panel of economists. Department of Economics, North Carolina State University, Working Paper, No. 004.
Mullineaux, D.J. (1978). On testing for rationality: Another look at the Livingston price expectations data. The Journal of Political Economy, 86(2), 329-336.
Muth, J.F. (1961). Rational expectations and the theory of price movements. Econometrica, 29(3), 315-335.
Nielsen, H. (2003). Inflation expectations in the EU-rational? Paper presented at the Eighth Spring Meeting of Young Economists, Catholic University of Leuven, Belgium.
Osterberg, W.P. (2000). New results on the rationality of survey measures of exchange-rate expectations. Federal Reserve Bank of Cleveland Economic Review, 36(1), 14-21.
Philips, P.C.B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.
Puah, C.H., Chong, L.L.Y., and Jais, M. (2011). Testing the rational expectation hypothesis on the retail trade sector using survey data from Malaysia. Journal of International Business and Economics, 11(4), 214-218.
Puah, C.H, Wong, S.S.L., & Liew, V.K.S. (2012). Testing rational expectations hypothesis in the manufacturing sector in Malaysia. Journal of Business Economics and Management (forthcoming).
Richardson, M., & Smith, T. (1991). Tests of models in the presence of overlapping observations. Review of Financial Studies, 4(2), 227-254.
Sheffrin, S.M. (1983). Rational Expectations. Cambridge: Cambridge University Press.
Takagi, S. (1991). Exchange rate expectations: A survey of survey studies. International Monetary Fund Staff Papers, 38(1), 156-183.
Theil, H. (1966). Applied Economic Forecasting. North-Holland: Amsterdam.
Wong, S.S.L., Puah, C.H., and Abu Mansor, S. (2011). Survey Evidence on the rationality of business expectations: Implication from the Malaysian agricultural sector. Journal of Economic Computation and Economic Cybernetics Studies and Research, 45(4), 169-180.