MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY Tran Huu Nghi OIL PRICES AND STOCK RETURNS: EVIDENCE FROM VIETNAMESE PETROLEUM AND TRANSPORTATION INDUSTRIES MASTER’S THESIS HO CHI MINH CITY 2010 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY Tran Huu Nghi OIL PRICES AND STOCK RETURNS: EVIDENCE FROM VIETNAMESE PETROLEUM AND TRANSPORTATION INDUSTRIES Ology: Finance – Banking Ology code: 60.12 MASTER’S THESIS Advisor PhD. Nguyen Thu Hien HO CHI MINH CITY 2010 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Acknowledgements First of all, I would like to express my deepest gratitude and sincere thanks to my advisor, PhD. Nguyen Thu Hien, for her valuable advice, suggestions, and comments throughout every step of my study. Secondly, I would like to thank all my professors for giving me fundamental and academic knowledge during years of my study.
Especially, I would like to send my special thanks to Dr. Cao Hao Thi, who gave me necessary statistical knowledge to finish this study. Thirdly, my thanks would also go to my classmates, and my colleagues for their supports and encouragements. Finally, I would like to thank my parents, and all members in my family those who are always by my side and encourage me during my study.
i LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abstract The study aims to examine the impact of oil price changes on the stock returns in Vietnam market by analysing daily data during the period from January 2006 to December 2009. The international multi-factor model is taken as an approach in the paper in order to investigate the relationship between oil price changes and stock returns of Ho Chi Minh Stock Exchange, petroleum, and transportation industries on Ho Chi Minh Stock Exchange. Evidence shows that there are significant links between oil price changes of the previous day and stock returns of these two industries and HoSE. These results are useful for investors, managers, and policy makers.
ii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS Acknowledgements.ii TABLE OF CONTENTS.iii LIST OF FIGURES.v LIST OF GRAPHS.v LIST OF TABLES.vii CHAPTER 1: INTRODUCTION 1.1 Rationale of the study.2 Research questions and objectives.3 Scope and limitation.5 Significance of the study.6 Structure of the study.04 CHAPTER 2: LITERATURE REVIEW 2.2 Capital Asset Pricing Model (CAPM).3 Arbitrage Pricing Theory (APT).4 Oil price changes and rationality of Stock market.14 CHAPTER 3: METHODOLOGY AND DATA 3.18 iii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.2 Oil price changes.3 Exchange rate returns.28 CHAPTER 4: DATA ANALYSIS 4.2 Regression results with OILt-1.3 Summary of regression results.2 Summary of findings.3 Limitations and further researches.52 Appendices Appendix 1: Vietnam petro prices 2006-2009.55 Appendix 2: Regulated amplitude of exchange rate 2006-2009.56 iv LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 1.1: Structure of the study.1 Hypothesis H1 testing result.2 Hypotheses H2, H3, H7 and H8 testing results.41 LIST OF GRAPHS Graph 1.1: Oil prices and VNindex in 2008.1: Fluctuation of oil price 2006-2009.2: Fluctuation of VNindex 2006-2009.1: Histograms and Q-Q plots of daily stock returns.2 Histogram and Q-Q plot of index residual.3: Histogram and Q-Q plot of petro residual.4 Histogram and Q-Q plot of trans residual.42 v LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 3.1: Testing hypotheses for the significance.2: List of stocks in the petroleum industry.3: List of stocks in the transportation industry.1: Descriptive statistics of stock returns, oil price changes, and exchange rate returns.2: Correlations of Indext, Petrot, Transt with OILt and TWEXt.3: Correlations of Indext, Petrot, Transt with OILt-1.4: Regression analysis of the relation between Indext and OILt-1.5 Hypothesis H1 testing result.6 Regression analysis of the relation between Ln( ε Indext 2 ) and E(Indext).7 Regression analysis of the relation between Petrot and OILt-1.8 Regression analysis of the relation between Transt and OILt-1.9 Hypotheses H2, H3, H7 and H8 testing results.10 Correlation between OILt-1 and Index residual.11 Corelation between OILt-1 and Index residual.12 Regression analysis of the relation between Ln( ε Petrot 2 ) and E(Petrot).13 Regression analysis of the relation between Ln( ε Transt 2 ) and E(Transt).1 Changes in ROE.2 Summary of the study hypotheses testing results.50 vi LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABBREVIATIONS ADF Augmented Dickey – Fuller APT Arbitrage Pricing Theory CAPM Capital Asset Pricing Model GCC Gulf Cooperating Council HoSE Ho Chi Minh Stock Exchange OLS Ordinary Least Square ROE Return on Equity vii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 1 Introduction Page 1 CHAPTER 1: INTRODUCTION This chapter introduces the rationale of the study, research questions and objectives. The study scope, significance, and the structure of the study are also discussed in this chapter.1 RATIONALE OF THE STUDY Oil is a very essential energy for any country all over the world. Changes in oil price have become one of the most important factors that contribute to current global economic activity. Oil price hikes would make price in commodities increase, and in turn, hearten global inflation and slow down economic growth.
Moreover, oil is one of the operational cost factors. The higher oil price increases, the higher production cost is. For this reason, oil price hikes will cause expected earnings to decline, which bring a decrease in stock prices. In other words, increasing oil price potentially affects stock market performance by altering financial performance or cash flows of companies.
As illustration of this, the oil price increased 52.67% between January 2008 and June 2008, and VNindex decreased 52.68% on the same period.1: Oil prices and VNindex in 2008 900 800 S$per barrel) 700 600 500 400 VNindex Pric e (U 300 Oil Pric e 200 100 0 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 1 Introduction Page 2 Many papers in the world investigated the relationship between oil price changes and the stock returns. However, the results were various. For instance, using an international multifactor model, Basher and Sadorsky (2006) showed a significant relationship between oil price changes and stock markets in emerging countries. By contrast, other papers showed that oil price changes do not have significant impacts on stock returns (Chen, Roll, and Ross - 1986, Agusman and Deriantino – 2008) or oil future returns are not correlated with stock market returns, except in the case of oil company returns (Huang et al.
– 1996) or changes in oil price affect trivially real stock returns in net oil exporting countries (Jones and Kaul – 1996). Thus, whether there is any relationship between oil price changes and Vietnam stock returns or not is still a big question without answer. Therefore, the aim of the study is to examine the impact of oil price changes on Vietnam stock returns in order to find out the answer for that big question. The study is important because of several reasons: • First, Stock market contribution to the Vietnam economy, which is indicated by the share of market capitalisation to GDP, has been increasing rapidly.
In 2005, market capitalisation to GDP was 0. It went up sharply to 22.6% in 2006, and by the end of 2007 was 40%. It is clear that the role of the stock market in the domestic economy is more and more significant, and it is important to examine any risk factors contribute to stock performance, including changes of oil price. • Second, it expects that oil price changes would influence the domestic economy, and this could be caused by their impact on the stock market.
However, very limited research on this has been made. By examining the Vietnam data, the study will contribute to the literature on this area. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 1 Introduction Page 3 1.2 RESEARCH QUESTIONS AND OBJECTIVES The objectives of the study are to examine the impact of oil price changes on Vietnam stock exchange market in general, and to measure the impact of oil price changes on stock returns of petroleum and transportation industries by using daily data during the period from January 2006 to December 2009. The study will be the answer for these questions: • Is there a relationship between oil price and stock returns in Vietnam? • How does oil price affect to the Vietnam stock market in general, and to stock returns of petroleum and transportation industry in particular? 1.3 SCOPE AND LIMITATION Due to time restriction, the study will examine the impact of oil price changes on Ho Chi Minh Stock Exchange, and measure the impact of oil price changes on stock returns of petroleum and transportation industry on Ho Chi Minh Stock Exchange, which are two on many industries affected directly by oil price changes.
Data will be collected during the period from January 2006 to December 2009 on Ho Chi Minh Stock Exchange.4 RESEARCH METHODOLOGY This study uses the multiple regression model for the stock returns of Ho Chi Minh Stock Exchange, and petroleum and transportation industries to define the relationship between oil price and Vietnam stock returns, and to measure this relationship. The data for this study consist of daily oil price changes, and stock returns during the period from 2006 to 2009. Daily stock returns are calculated from closing prices of HoSE index, and stocks in petroleum and transportation industries. Oil prices are the West Texas Intermediate Spot prices FOB of crude oil, which are available from the Energy Information Administration.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 1 Introduction Page 4 1.5 SIGNIFICANCE OF THE STUDY • Examining the impact of oil price changes on the stock returns helps government to make plans and macroeconomic policies based on predicting of oil price changes so that they could regulate more effectively the Stock Exchange particularly and the domestic economy generally. • Besides, it also gives investors evidences that help them to analyse and to manage their portfolios more efficiently.6 STRUCTURE OF THE STUDY The study consists of 5 chapters: - Chapter 1 (Introduction) introduces the study. This chapter includes the rationale of the study, research objectives, research methodology, significance of the study, and scope and limitation. - Chapter 2 (literature review) shows theoretical background related to the study, and previous researches in the study’s field.
- Chapter 3 (Methodology and data) discusses the research methodology, and describes the data used in the study as well. - Chapter 4 (data analysis and findings) analyses data and finds out the impact of oil price changes on stock returns based on the analysed data. - Chapter 5 (conclusions) summarises the study, indicates limitations and suggests possible further researches. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 1 Introduction Page 5 Figure 1.1: Structure of the study Chapter 1: Introduction Chapter 2: Literature review Chapter 3: Methodology and data Chapter 4: Data analysis Chapter 5: Conclusions LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Chapter 2 Literature Review Page 6 CHAPTER 2: LITERATURE REVIEW This chapter discusses in details the theoretical background related to the study, such as Market Efficiency, Capital Asset Pricing Model, and Arbitrage Pricing Theory.
Some previous researches are also introduced in this chapter.1 Market Efficiency In finance, there are some models which describe the structure of stock prices based on different factors, such as Capital Asset Pricing Model, and Arbitrage Pricing Theory. In fact, investors are much interested in how fast stock prices fluctuate in response to changes to the relevant factors. In order to examine these changes, it is very necessary to understand the concept of financial market efficiency. The efficient-market hypothesis was first expressed by Louis Bachelier in his 1900 dissertation, “The Theory of Speculation”.
Bachelier recognises that “past, present and even discounted future events are reflected in market price, but often show no apparent relation to price changes”. However, his work was largely ignored until 1950s. The efficient-market hypothesis was developed by Professor Eugene Fama at the University of Chicago Booth School of Business as an academic concept of study through his published Ph.