Rational or irrational expectations? Evidence from China's stock market

Purpose – The paper aims to test the rational‐expectations hypothesis using data from the Chinese stock market. Design/methodology/approach – The rational‐expectations hypothesis plays a critical role in economic and financial studies. However, it is unclear whether this hypothesis is consistent with real‐world decision making since existing empirical results are mixed. This paper tests the hypothesis directly using survey data from China's stock market by developing a technique to analyze discrete or limited independent‐variable models. Findings – The paper shows that in China's stock market survey forecasts are overly optimistic, especially with positive information, and can be improved slightly using past information. Originality/value – The paper develops a technique to analyze the discrete or limited independent‐variable model. Testing with Chinese stock market data provides some insights into the characteristics of emerging markets.