UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS A CAUSE AND EFFECT RELATIONSHIP BETWEEN FOREIGN INSTITUTIONAL INVESTMENT FLOWS AND STOCK MARKET RETURNS VIETNAM CASE STUDY By NGUYEN XUAN PHAP MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, August 2012 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS A CAUSE AND EFFECT RELATIONSHIP BETWEEN FOREIGN INSTITUTIONAL INVESTMENT FLOWS AND STOCK MARKET RETURNS VIETNAM CASE STUDY A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN XUAN PHAP Academic supervisor Dr. DUONG NHU HUNG HO CHI MINH CITY, August 2012 TIEU LUAN MOI download : skknchat@gmail.com CERTIFICATION “I certify that the substance of this thesis has not already been submitted for any degree and have not been currently submitted for any other degree. I certify that to the best of my knowledge and help received in preparing this thesis and all sources used have been acknowledged in this thesis.” NGUYEN XUAN PHAP i TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGMENTS I would like to thank all Professors at VNP, who have taught me initial economics lessons as well as guided me to further research later. I specially express my deep gratitude to Professor Doctor Duong Nhu Hung, Lecturer at Shool of Industrial Management, University of Technology-Vietnam National University HCMC.
He has encouraged me to develop and complete this thesis from the initial proposal with wholehearted guidance, useful advice that enabled me to be patiently inquiring and more creative. I owe so much my family and closed friends who gave me tremendous support in life and study. Therefore, I take this chance to express my deep gratitude to them all. Finally, I pride myself for working very hard to finish this thesis.
This seems fruit of my studying at VNP with many obstacles that I have overcome with determination and enthusiasm. ii TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT Many previous studies has investigated the relationship between Foreign Institution Investment (FII) and stock market return in emerging markets of Asia such as Taiwan, Thailand, Korea, especially India with a lot of studies reseaching this relationship. However, some of them investigated the relationship in mean, the other focused on volatility. Wishing to have the combination research, with new approach in econometrics like VAR, multivariate GARCH, I carried out the investigation on this relationship that there has been no empirical study reseached in Vietnam market so far.
This thesis tried to investigate the relationship between FII and the stock market return in Vietnam represented by Ho Chi Minh Stock market (HOSE) in mean and volatility. Data are used from year 2004-2011 including the two sub-periods of pre-crisis and during criris and found that FII caused the stock market return in all periods in mean; the stock market return caused FII only during crisis. Regards to volatility, there was no long-term effect between the two series. FII had short-term effect to the stock market return, especially during crisis.
iii TIEU LUAN MOI download : skknchat@gmail.com ABBREVIATIONS AIC Akaike Information Criteria ARCH Autoregressive Conditional Heteroscedastic BEKK Multivariate model proposed by Baba, Engle, Kraft and Kroner BSE Bombay Security Exchange FII Foreign Institution Investment GARCH Generalized Autoregressive Conditional Heteroscedastic HNX Hanoi Stock Exchange HOSE Hochiminh Stock Exchange NSE National Stock Exchange of India SIC Schwartz Bayesian Information Criterion SMR Stock Market Return VAR Vector Auto Regression VN-Index Vietnam Ho Chi Minh Stock Index iv TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS Chapter I : INTRODUCTION. 7 Chapter II : LITERATURE REVIEW. Conceptual frame work. 15 Chapter III : DATA SOURCE, RESEARCH METHODOLOGY AND HYPOTHESIS.
Data source & variables. Unit Root Test. Granger causality test. VAR BGARCH-BEKK (1,1) model.
25 Chapter IV : FINDINGS AND DISCUSSIONS. Data and descriptive statistics. Hypothesis testing and findings. 41 Chapter V : CONCLUSIONS, POLICY IMPLICATIONS AND LIMITATIONS.
44 v TIEU LUAN MOI download : skknchat@gmail. 53 vi TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 2.1: Liturature review summary .1: Descriptive statistics of FII flow and stock market return in three periods of time .2: The results of unit root testing for FII and stock market return in periods considering intercept and trend in equation.3: VAR Granger causality between FII and stock market return .4: Bivariate GARCH(1,1)-BEKK model for FII and stock market return in HOSE .5: Result of hypothesis testing .42 vii TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 1.1 Deposited shares by years.2: Percentage of deposited shares as proportion of registered shares per year .4: VN-Index and Net trading volume of FII as proportion of the whole market of HOSE .1: Causality between FII flows and stock market return .1a : The whole period graph with sub-period marks for monthly FII in HOSE .1b : The whole period graph with sub-period marks for monthly stock market return in HOSE.2a : The whole period graph with sub-period marks of monthly FII in HOSE varied by season .2b : The whole period graph with sub-period marks of monthly stock market return in HOSE varied by season .32 viii TIEU LUAN MOI download : skknchat@gmail.com LIST OF APPENDICES Appendix A: Unit root test. 53 Appendix B: VAR Residual Normality Test. 61 Appendix C: VAR Granger Causality.
64 Appendix D : Ljung-Box/Correlogram test. 77 Appendix E: Bivariate Garch model estimation from R-Plus. 83 ix TIEU LUAN MOI download : skknchat@gmail.com Chapter I : INTRODUCTION Foreign Institutional Investment (FII) flows which are commonly known as international portfolio flows, refer to capital flows made by individual and institutional investors across national borders in creating an internationally diversified portfolio. FII flows almost had not appeared until 1980’s.
But following a strong trend towards globalization, widespread financial liberalization and implementation of financial market reforms in many countries all over the world had actually led FII flows during 1990’s. According to Bekaert and Harvey (2000), FII as a proportion of a developing country's GDP increases remarkably with liberalization as through an integration of domestic financial markets with the global markets, free capital flows from countries which are rich to those are scare in capital in seeking of higher rate of return and increased productivity and efficiency of capital at global level. Vietnam stock market overview In order to develop the country, Vietnam has been required to restructure the economy to be more efficient and competitive. For this purpose, Vietnam had demanded much more capital of investment.
Thus, securities market establishment in Vietnam is necessary to mobilize capital for the economy development. The Prime Minister signed Decree No. 48/1998/ND-CP on July 10th 1998 about stock and securities market and Decision No.127/1998/QĐ-TTg on July 11th 1998 to establish the two securities trading centers in Hanoi and Ho Chi Minh City. However, till July 20th 2000, the Ho Chi Minh City Securities Trading Center was officially opened and then was changed into Hochiminh Stock Exchange (HOSE) on August 08th 2007 (Hochiminh Stock Exchange, 2011).The Hanoi Securities Trading Center (HASTC) was put into operation on 08th March 2005 and officially changed into Hanoi Stock Exchange (HNX) on 24th June 2009 for listing and 1 TIEU LUAN MOI download : skknchat@gmail.com transaction only stocks of companies with charter capital less than VND 30 billions (Hanoi Stock Exchange, 2011) Figure 1.1 below shows us the increasing trend of deposited shares by years.
DEPOSITED SHARES BY YEAR 25000 20000 15000 10000 5000 0 2006 2007 2008 2009 2010 2011 Millions of shares Figure 1.1 Deposited shares by years Sources: Vietnam Securities Depository. Retrieved August 30, 2012, from http://vsd.vn/en/p40c44/annual-report.htm Obviously, deposited shares remarkably increase in the three years from 2008. This also shows the corporation equitization process increasing during crisis in according with government policy to reconstruct corporations in which the equitization is required for more effectiveness. Besides, we can see the trend of deposited shares as proportion of registered shares per year for the whole Vietnam stock market in Figure 1.2 as follows; 2 TIEU LUAN MOI download : skknchat@gmail.com % DEPOSITED/REGISTERED SHARES PER YEAR 1 0,8 0,6 0,4 0,2 0 2006 2007 2008 2009 2010 2011 % DEPOSITED/REGISTERED SHARES PER YEAR Figure 1.2: Percentage of deposited shares as proportion of registered shares per year Sources: Vietnam Securities Depository.
Retrieved August 30, 2012, from http://vsd.vn/en/p40c44/ancnual-report.htm The ratio reach to the highest point around 0.It means that remaining 30 percent of registered shares haven’t been deposited yet. These shares which are often held by state shareholders, financial institutions, members of management board are not ready for transaction during defined period of time. Up to now, numbers of listing stocks in HOSE and HNX have been 353 and 394 respectively. However, considering the size and trading volume, HOSE is much bigger than HNX.
In year of 2011, numbers of transacted shares in HOSE and HNX are 8,280,645,959 and 7,943,573,441 with the equivalent amount of VND 159,144 billion (Hochiminh Stock Exchange, 2012) and VND 95,847 billion (Hanoi Stock Exchange, 2012) respectively. This means that the trading volume of HNX is around 60.2% proportion of HOSE. While foreign trading in HOSE and HNX is VND 57,294 billion and VND 4,497 billion respectively equivalent to 36% and 4.7 % of total trading of each corresponding exchange market. Moreover, in terms of amount, foreign trading in HNX is only 7.8% proportion of HOSE.
Therefore, 3 TIEU LUAN MOI download : skknchat@gmail.com foreign trading activities in HNX are not really remarkable compared to those in HOSE and their effect to HNX is less important than to HOSE. Hence, the effect of foreign trading in HOSE should be considered and HOSE with its dominance can be used as representative for the whole stock market of Vietnam for investigating foreign trading activities and the causality between FII and stock market return. Actually, there are some kinds of securities transacted in HOSE such as stock, bond and fund certificate. However, company stock has a big scale in the market.
Thus, in this study only stock transactions in HOSE can be used for calculation.3 shows the listing scale in HOSE at the end of 2011. 1,870,00 6,23 Stock Bond Fund Certifcate Others 91,91 Figure 1.3: Listing Scale 2011 Sources: Hochiminh Stock Exchange. Retrieved January 15, 2012, from http://www.vn/hsx_en/Modules/Statistic/QMNY.aspx 4 TIEU LUAN MOI download : skknchat@gmail.com FII in Vietnam FII takes part in the Vietnam stock market in kinds of individual or institutional investor that usually has been known as foreign fund. To date, the fund invests in Vietnam mainly in the form of investment company or investment fund which have been established by foreign investors in third countries offering tax advantage like the British Virgin Island or Bermuda and then open investment accounts in Vietnam as a foreign portfolio investor.
In the past three years, more than 8,100 institutional investors and individuals abroad have opened trading accounts in Vietnam. In 2010, there were 289 organizations and 950 foreign individuals are granted trading codes, up 25. At the end of 2011 accounts of foreign investors were 15,569 including 1,724 organizations and 13,845 foreign individuals (Vietnam Securities Depository, 2012). Number of investment funds operating in Vietnam is quite large, about more than 400 funds, while fund established within the country is too small, only 23 funds with small size of capital as well.
FII has flown into Vietnam with big proportion but after the first half of the year 2008 this FII decreased in the context the financial crisis widespread all over the world.4 below shows us the situation. Moreover, it shows that FII varied a lot with a big difference between the two periods before and after the year 2008. Compared to the first period with high variation, FII in the second period varied more slightly.