UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUES VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS AN EMPIRICAL STUDY ON STOCK RETURNS, VOLUME, AND VOLATILITY: LISTED COMPANIES ON THE HO CHI MINH CITY STOCK EXCHANGE By Nguyen Dinh Tu Nhi MASTER OF ARTS IN DEVELOPMENT ECONOMICS July 2012 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUES VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS AN EMPIRICAL STUDY ON STOCK RETURNS, VOLUME, AND VOLATILITY: LISTED COMPANIES ON THE HO CHI MINH CITY STOCK EXCHANGE A thesis submitted to Vietnam – Netherlands Programme in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By Nguyen Dinh Tu Nhi Supervisor Dr. Truong Tan Thanh July 2012 TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENTS I am not able to finish this thesis without the guidance of my supervisors and committee members, supports from classmates, and aids from my family. I would like to express my very great appreciation to my supervisors, Dr. Le Van Chon and Dr.
Truong Tan Thanh, for their patient guidance, enthusiastic assistance, and useful critiques, valuable and constructive suggestions during my research. I am also particularly grateful for the assistance given by Dr. Nguyen Trong Hoai and Dr. Pham Khanh Nam for motivating and supporting me to complete the thesis.
I would like to offer another thank to Dr. Duong Nhu Hung, who inspires me to choose this topic for my thesis. My grateful thanks are also extended to staffs of the Administration Department and Library of Vietnam-Netherlands Programme in providing me good environment and facilities to complete the thesis. Finally, I would like to express my love and gratitude to my family and friends for their understanding, supports, and encouragements throughout the research.
TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS CHAPTER 1: INTRODUCTION. 4 CHAPTER 2: LITERATURE REVIEW. The Efficient Market Hypothesis. The Mixture of Distributions Hypothesis.
The Sequential Information Arrival Hypothesis. The Generalized Autoregressive Conditional Heteroskedasticity. 10 CHAPTER 3: VIETNAMESE STOCK MARKET AND LISTED COMPANIES ON. 15 THE HO CHI MINH CITY STOCK EXCHANGE.
Vietnamese stock market. 25 CHAPTER 4: ECONOMETRIC MODELS AND DISCUSSION. Test for stationarity in stock return and trading volume:. Trading volume and return volatility.
51 TIEU LUAN MOI download : skknchat@gmail.exchange LIST OF TABLES TABLE PAGE 1. Table 1 Description of stocks…………………………………………………………. Table 2 Descriptive statistics …………………………………………………………. Table 3 ADF test……………………………………………………………………….
Table 4 PP test ………………………………………………………………………. Table 5 GARCH (1,1) model without LnVol…………………………………………. Table 6 Likelihood ratios of stocks……………………. Table 7 GARCH (1,1) model with LnVol…………………………………………….40 TIEU LUAN MOI download : skknchat@gmail.exchange ABSTRACT AN EMPIRICAL STUDY ON STOCK RETURNS, VOLUME, AND VOLATILITY - LISTED COMPANIES ON THE HO CHI MINH CITY STOCK EXCHANGE By Nguyen Dinh Tu Nhi The thesis examines the relationship between stock returns, trading volume and return volatility.
With the focus on listed companies on the Ho Chi Minh City Stock Exchange over the period between 01 Jan 2007 and 31 Dec 2011, the study conducts GARCH (1,1) to model the relationship between stock return, trading volume, and volatility. We also include a dummy to capture possible effect of pre and post-crisis on stock return volatility. The analysis results show that there exists an influence of trading volume on stock return, even after controlling effects of foreign trading volume. It is also evident that trading volume has some predictive power to return volatility.
We also find our results consistent with previous studies such as Clark (1973) and Copeland (1976). The result also implies that Vietnamese stock market is efficiently weak at least for listed companies on the Ho Chi Minh City Stock Exchange. Key words: Trading volume, stock returns, return volatility, foreign trading, GARCH. TIEU LUAN MOI download : skknchat@gmail.exchange CHAPTER 1: INTRODUCTION 1.
Problem statement In each country, the stock market reflects the health of its economy. It does not only affect foreign exchange and gold markets but also credit market and option market. Actually, when a stock market is strong, the investors often tend to convert foreign currency and gold into cash to invest in stocks. It will depreciate foreign currency and gold consistently and vice versa.
In other hands, in term of weak stock market, the Government will tighten cash flow for stocks as well as the banks will reduce disbursement for stocks and vice versa. For option market, the strong stock market will lead to growth of different kinds of options because investors expect to earn more profits. In Vietnam, the stock market also plays an important role to mirror the changing economy. For instance, when the information of bad debts or higher inflation is proclaimed, the VN- index will decrease sharply.
Likewise, when the Government introduces some supporting policies to the economy, the VN-index has a chance to increase. The fluctuation of VN- index also indicates a development or recession of economy. That is called bi-directional effect of information and stock market. In the mean-variance analysis, the expected stock returns and return volatility are important factors that investors concentrate on because returns and volatility imply risks for investors’ portfolio.
Moreover, the volume of trade is also supposed to be an authoritative component of absorbing information in the stock market. In case investors believe in higher return on stocks, they tend to deal more and lead to higher trading volume in the stock market. In contrast, when they forecast lower return on stocks, they will trade less or the trading volume will decrease. Hence, the higher or lower trading volume may be a signal of 1 TIEU LUAN MOI download : skknchat@gmail.exchange the fluctuations of stock returns.
As a result, the relationships among stock returns, trading volume and return volatility have become vital topics in empirical researches. There are many papers on return-volume and volume-volatility relationships. For the return-volume relationship, Karpoff (1987) finds the positive asymmetric relationship between volume and price change in the equity market. Another model which also predicts the asymmetric relationship between trading volume and price changes is initiated by Epps (1975) and complemented by Jennings, Starks, and Fellingham (1981).
Two above models relates to flow of information. Furthermore, Granger, Morgenstern, and Godfrey (1964) and Granger (1968) use data of indices and individual stocks on the New York Stock Exchange to test the relationship between price changes and trading volume. They find that price changes follow a random walk in which the past trend of stock price cannot predict its future trend. Mohammadreza Mehrabanpoor, Babak Valizadeh Bahador, and Gholamreza Jandaghi (2005) also get the positive relationship between market turnover and indices on the Tehran Stock Exchange.
In addition, Michael Long (2007) finds a significantly positive interaction between absolute value of call price changes and trading volume in the option markets. For the volume-return volatility relationship, Engle (1982) originates the Autoregressive Conditional Heteroskedasticity (ARCH) Model, which enumerates that stock returns follow a mixture of distribution. Later, Bollerslev (1986) starts the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) Model and consider trading volume as a proxy of information flow. Thus, the model is developed by Lamoureux and Lastrapes (1990), Brailsford (1996), Mestel, and Gurgul and Majdosz (2003).
Brailsford (1996) contends that the relationship between stock return volatility and volume 2 TIEU LUAN MOI download : skknchat@gmail.exchange is positive through GARCH model. However, some present opposite views. Fujihara and Mbodja Mougoue (1997) find that there is no causal relationship between return and volume. According to Roland Mestel, Henryk Gurgul, and Pawel Majdosz (2003), the relationship between stock return and trading volume is too weak to forecast each other.
Berna Okan, Onur Olgun, and Sefa Takmaz (2009) conclude that trading volume has negative effect on return volatility by applying GARCH, EGARCH, and VAR models. For the Vietnamese market, Truong Dong Loc (2009) investigates the unilateral causality effect of HNX-index to trading volume. Furthermore, Truong Dong Loc and Dang Thi Thuy Duong (2011) replicate the study with the data of foreign trading volume, and find that the index influences net foreign volume, but the reverse is not true. There are only few researches that has examined relationship between stock returns and trading volume during the recent crisis, and accounted for effect of foreign trading volume across different industries using GARCH model.
This thesis attempts to fill this gap by examining the relationship between trading volume and stock return and between return and volatility for listed companies on the Ho Chi Minh City Stock Exchange. Particularly, we test the effect of trading volume on stock return and return volatility by applying GARCH (1, 1) model. Research questions To clarify the relationships among trading volume, stock returns and return volatility, I collect data series of intra-day stock prices to test the appropriate model. The final purpose is that, in this paper, I am going to answer the following research questions: (i) Is there the relationship between trading volume and return volatility? and (ii) Does trading volume cause stock returns? 3 TIEU LUAN MOI download : skknchat@gmail.
Research objectives To reach above aims, my objectives of the paper are: (1) To examine the relationship between trading volume and return volatility and, (2) To understand the impact of trading volume on stock return through GARCH (1,1) model. To that end, I use data of eight listed companies on the Ho Chi Minh City Stock Exchange (HOSE) before and after the recession triggered by the US sub-prime mortgage crisis. The remainder of the paper is arranged as follows. Section Two gives a brief literature review of empirical studies.
Section three presents description of Vietnamese stock market and explains specific characteristics of data. This section also exposes statistics of selected stocks in the HOSE. The methodology and discussion of empirical results are in section four which is followed by Conclusion. 4 TIEU LUAN MOI download : skknchat@gmail.exchange CHAPTER 2: LITERATURE REVIEW There are many empirical studies on relationships among trading volume, stock returns and return volatility.
At the outset, the Efficient Market Hypothesis is important for stock markets; however, it also contains some controversies. Hence, the Mixture of Distribution and the Sequential Information Arrival Hypotheses are introduced to supplement the Efficient Market Hypothesis. The Efficient Market Hypothesis The Efficient Market Hypothesis (EMH) is one of important theories for financial series data. The EMH is introduced by Fama (1970) and widely admitted by modern economists.
They think that the financial market is extremely efficient to reflect information about individual stocks and the stock market. The EMH hypothesizes that stock prices are able to reflect all available information so that they mirror all credence of investors about the future. Under the EMH, the flow of information integrates with prices of stock promptly and efficiently at any point in time, therefore, the current stock price is not used to forecast movements of price hereafter. Based on the availability of information, Keith and Dirk (2005) recommend three versions of the EMH, including weak, semi-strong, and strong forms.
In the weak-form efficiency, stock prices merely reflect all public available information in the past. The stock prices are the most easily public accessible information in the stock markets. In the semi-strong form efficiency, the stocks prices reflect not only all available public information but also new public information immediately. The available public information compromises both past prices and relevant information, such as: claimed financial statements, announcements of dividends and profits, share splits, merge and acquisitions, 5 TIEU LUAN MOI download : skknchat@gmail.exchange influence of macroeconomics (inflation, interest rate, exchange rate, so on), and vice versa.
Under the semi-strong form, the current market price is the best predictor of a fair stock price. Thus, both above hypotheses claim that no one can earn by trading on the information that other investors have comprehended. However, the semi-strong form is stronger than weak form.