Tests of a Partial Adjustment Model of Financial Ratios

Author

Chunchi WU, Singapore Management UniversityFollow
Chihwa KAO, Syracuse University
Cheng F. LEE, Syracuse University

Publication Type

Journal Article

Publication Date

9-1992

Abstract

This article considers the formation of expectations in the financial ratio adjustment. An empirical model consistent with the rational-expectations hypothesis is formulated to analyze the dynamic adjustment pattern of financial ratios. The nonlinear regression method is used to estimate the parameters of the rational-expectations model and to test the validity of rationality. The empirical results show that the rational-expectations model explains the dynamic adjustment of financial ratios reasonably well. The results also show that the rational-expectations model provides a more efficient framework than the simple partial adjustment model for predicting the future ratios.

Keywords

Unanticipated money growth, United States, unemployment

Discipline

Business | Finance and Financial Management

Research Areas

Finance

Publication

Quarterly Review of Economics and Finance

Volume

32

Issue

3

First Page

96

Last Page

111

ISSN

1062-9769

Publisher

JAI Press

Citation

WU, Chunchi; KAO, Chihwa; and LEE, Cheng F.. Tests of a Partial Adjustment Model of Financial Ratios. (1992). Quarterly Review of Economics and Finance. 32, (3), 96-111.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/862