Expectations and Stock Market in Nepal

Abstract

This study examines the presence of both rational and adaptive expectations hypotheses in the Nepalese stock market by employing panel data analysis under the Fama–French three-factor model. Under the adaptive expectation hypothesis, the book to market equity is an essential determinant in the Nepalese stock market, and only the past 2-year information can explain investment decisions. Likewise, under the rational expectation hypothesis, the value factor, size factor and excess market return are important determinants during the investment decision. The past 3 years of information and the next 3 years of future information are necessary to estimate stock market return under rational expectation. Thus, this study reveals that the investment decision in the Nepalese stock market depends on the investor’s choice and preference upon the factors that are incorporated in the Fama–French three-factor model and the types of expectations in which the investors mostly believe.