MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY TRẦN THÙY HUYÊN THE RELATIONSHIP BETWEEN VIETNAM, UNITED STATES AND RELATED A ASIAN STOCK MARKETS MASTER THESIS Ho Chi Minh City 2011 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY TRẦN THÙY HUYÊN THE RELATIONSHIP BETWEEN VIETNAM, UNITED STATES AND RELATED ASIAN STOCK MARKETS MAJOR: BANKING AND FINANCE MAJOR CODE: 60.12 MASTER THESIS Supervisor: DOCTOR VO XUAN VINH PROFESSOR TRAN HOANG NGAN Ho Chi Minh City 2011 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT First and foremost, I am very much indebted to Doctor Vo Xuan Vinh for the sociable, motivation and professional guidance and comment. I understand you sacrificed your valuable time and resources to help me conduct this thesis. Secondly, my heartfelt gratitude goes to my supervisor the Professor Tran Hoang Ngan. It is by his clemency that I am writing this thesis today.
Thank you very much for your understanding, commitment and your advice regarding my thesis. Professors and the entire lecturers in University of economics HCMC, I thank you for academic guidance and other support during my study. My master’s classmates, I thank you for your advice and I will always cherish the moments we had together. Last but not least, I would like to thank my family, especially my husband, my baby for the moral support and patience.
I am particularly grateful to them for the moral and advisory support during the entire of my studies and my life. i LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT The international relationship amongst the stock markets plays an important roles and implications for cost of capital and international portfolio diversification to both Vietnamese and foreigner investors. Vietnam becomes widely opening the trade and equity market since its entering to WTO in 2007. And recent movements of international financial liberation in Vietnam and its region raise questions whether Vietnam and its region stock markets in Asian are being integrated into world stock markets.
This research aims to examine that Vietnam and related Asian stock markets have interrelationships to the world stock markets using the daily data for the period 2005-2010. In determining the impact of the international financial crisis on interrelationship amongst stock markets, the research period is being divided into two sample periods: the pre crisis period spans from January 1st, 2005 to July 22, 2007 and the crisis period spans from July 23, 2007 to June 30, 2010. Seven indices of six stock markets are chosen based on the countries’ level of development and geographical factor. Six stock markets are Vietnam (Vietnam index), Singapore (Straits times’ index), Hong Kong (Hang Seng index), China (Shanghai stock exchange), Japan (Nikkei index) and United States (Standard & Poor’s index and Dow Jones index).
The first content examines whether there is long run comovement amongst the stock markets in sample. Bivariate and multivariate Johansen test are applied to daily stock price and daily stock return after conducting the tests for unit root with three tests of Dickey Fuller, Augmented Dickey Fuller and Phillip Perron. The second content investigates whether there is causal relationship amongst these markets using Granger causality test. The converging test is employed to know whether they are converging over time.
To analyses the return linkage, we replied on variance decomposition analysis. The first finding of research is that only two cointegrations exist between two pairs of US-China and US-Hong Kong stock market in the pre crisis period and no ii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com cointegrations exist in the crisis period when we conduct the bivariate Johansen test for daily stock price. Moreover, we also could not find the cointegration exist when multivariate Johansen tests when daily stock price is used. These results imply that the portfolio diversification is potentially worthwhile for investors.
However, the results of both bivariate and multivariate test for daily return are opposite. Cointegrations are found in the pre crisis and during the crisis period. It can be concluded that portfolio diversification may not bring benefits to investors. The Granger causality test results indicate the current global financial crisis affect significantly to the Granger causality relationship amongst the markets in sample and US market are recognized as a significant influence on the returns of Asian stock markets.
In addition, converging trend test results find that seven indies of six stock markets converge towards the group in whole period. The five Asian stock markets are also converging to US stock market in the whole period and crisis period. Except for Hong Kong and China, the other markets are converging to the group and US stock markets in the pre crisis time. When apply the variance decomposition analysis, we get the findings demonstrate that most of indices of six stock markets in our sample demonstrate the strong endogenous characteristics except for US, Vietnam and China stock market.
Generally, the results of this research find the relationship amongst Vietnam, US and other related Asian stock markets in both sub periods. Hence, the Vietnam and international investors should focus on portfolio diversification to other stock markets. On the other hand, policy makers should draw up the appropriate macroeconomic strategies to promote economic performance in Asian region and in the world because high international financial integration will help to upgrade the financial development. Key word: cointegration, stock markets, Granger causality, integration iii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENT Acknowledgement.
ii TABLE OF CONTENT. iv LIST OF FIGURES. vi LIST OF TABLE. Rationales of research.
Research objectives and research questions. Scope and methodology .1 Scope of research .2 Methodology of research. Structure of research. Johansen Cointegration test .1 Unit root test .1 The Dickey-Fuller test (DF) .2 The Augmented Dickey-Fuller test (ADF) .3 The Phillips-Perron test (PP).
Variance decomposition analysis. DATA AND DATA DESCRIPTION. Data descriptive statistics. Analysis of results of unit root test.1 The Dickey-Fuller test (DF).2 The Augmented Dickey-Fuller test (ADF) .3 The Phillips-Perron test (PP).
35 iv LUAN VAN CHAT LUONG download : add luanvanchat@agmail.1 Johansen cointegration test with daily stock price .1 Bi-variate cointegration test .2 Multivariate cointegration test .2 Johansen cointegration test with daily stock returns .1 Bi-variate cointegration test .2 Multivariate cointegration test. Variance decomposition analysis. Conclusion related to research questions. Contribution of research.
Limitation and Further research. 73 List of References. 130 v LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 1.1: Structure of research .1: Movement of daily closing price of stock index from Jan 1st 2005 to Jun 2010 .1: Short run causality effects (whole period) .2: Short run causality effects (pre crisis period) .3: Short run causality effects (crisis period). 59 LIST OF TABLES Table 4.1 Summary statistics of the stock returns (Whole period) .2: Summary statistics of the stock returns (Pre-crisis period) .3: Summary statistics of the stock returns (Crisis period) .4: Correlation matrix of average daily return (Whole period) .5: Correlation matrix of average daily return (Pre-crisis period).6: Correlation matrix of average daily return (Crisis period) .1: Var lag Order Selection .2: DF unit root test (daily price) .3: ADF unit root test (daily price) .4: PP unit root test (daily price).5: DF unit root test (daily return) .6: ADF unit root test (daily return).7: PP unit root test (daily return) .8: Bi-variate cointegration test result with intercept (no trend) in CE and test VAR (daily price of all stocks) .9: Multivariate cointegration test result with intercept (no trend) in CE and test VAR (daily stock price) .10: Bi-variate cointegration test result with intercept (no trend) in CE and test VAR .11: Multivariate cointegration test result with intercept (no trend) in CE and test VAR .12: Granger causality results (Whole period) .13: Granger causality results (Pre crisis period) .14: Granger causality results (Crisis period) .15: Test result for converging trend .19: the comparision of degree of exogeneity in pre crisis and crisis period .16: the comparision of degree of exogeneity in whole period .17: the comparision of degree of exogeneity in pre crisis period .18: the comparision of degree of exogeneity in crisis period.
78 vi LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Rationales of research It is well known that US is a big and main trading partner of many developed and developing countries in Asian and in the world. As a result, anything happens to the US economy will may cause effect to these Asian countries’ economy. This interrelationship phenomenon in international market is a result of the liberalization of capital markets in developed and developing countries and the increasing variety and complexity of financial instruments.
Financial specialists advocate that the US stock market fluctuation will bring effects to many other stock markets in the world. For example, the Nikkei 225 (Japan stock market) and Hangseng (Hong Kong stock market) perpetually cling to the S&P 500 (US stock market). While some previous researches in Vietnam believe that Vietnam stock market is frigid with US and regional stock markets. Researches on regional stock market linkages have become increasingly important for most investors.
The Asian region is vulnerable to ‘shocks’ (financial crisis as an example) and where the crisis is contagious, it can affect the entire region. For this reason, the countries in the region should become more concerned about their interdependency in the event of any occurrences of any financial crisis. For instance, the Asian financial crisis began with collapse of Thai baht in July 1997 and its stock market, and the subsequent erosion in Hong Kong and other Asian markets in October 1997 and as a result, the co-movement amongst the Asian financial markets increased (Maran, (2010). Thus, a question can be raised from the 2007-2010 international financial crisis whether this international financial crisis causes the changes of interrelationship amongst Vietnam stock market, US and region stock markets in short run and long run.
Page 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com In globalization integration economic environment, both investors and portfolio managers shall pay more attention to the knowledge of the international stock market structure. Many financial theories suggest that individual and institutional investors should hold a well-diversified portfolio to reduce risk. As investors become more risk averse, further risk diversification continues to be their main concern. To the international investor who is willing to make portfolio investments in different stock markets, they really need to know that diversification can give some gain or not.
The world co-movements amongst financial markets have reduced the diversification benefit. The international financial markets are quickly integrating into a global market since investors are driven to developing countries searching for higher returns and opportunities for risk diversification. If the stock markets amongst different countries move together, investment in different stock markets shall not create any long term gain to portfolio diversification. Hence researching results of stock market integration are useful when Asian economies are fastest growing economies.
This research results could be useful for investors, portfolio managers, corporate executives and policy makers. To our best knowledge, most empirical works have focused on developed markets, developing markets of South East Asia such as Becker et al (1990), Mak (1992) or Chan (1992). However, researches on the Vietnam stock market or Vietnam stock market’s data of the 2007-2010 international financial crisis have been very limited. This paper will investigates the interrelationship in long and short run amongst Vietnam, US and other related Asian stock markets in the pre crisis in 2007-2010 and during the crisis of period 2007-2010.
By this research, we hope to contribute towards adding the literature by providing the latest empirical proof on this topic. Page 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Problem statement Vietnam becomes WTO’s 150th member on 11 January 2007. According to the route of entering WTO, Vietnam opens the economics including the financial market as from the end of the year 2007.