UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business ----------------------------------- HUYNH THANH DUNG THE IMPACT OF MACROECONOMIC INDICATORS ON STOCK PRICES IN VIETNAM MASTER OF BUSINESS (Honours) SUPERVISOR: Dr. PHAM QUOC HUNG Ho Chi Minh City – 2013 i ACKNOWLEDGEMENTS Firstly, I would like to express my very great appreciation to my supervisor – Dr. Pham Quoc Hung – for his enthusiastic guidance, valuable and constructive suggestions during the planning and development of this thesis. I would also like to thank all of my lecturers at International School of Business (ISB) – University of Economics Ho Chi Minh City (UEH) – for sharing their knowledge and experience during my master course. Enthusiastic assistance provided by the ISB’s executive board and staffs was also greatly appreciated. I am grateful to all my friends and classmates form MBus 2 – ISB for their support. Finally, I would like to express my special thanks to my wife for her support and encouragement throughout my study. i ABSTRACT This study investigates the impact of macroeconomic indicators on Vietnamese stock prices using monthly data spanning from January 2008 to May 2013. Macroeconomic variables used in this study are industrial production index, lending interest rate, consumer price index (as a proxy for inflation), and exchange rate. The study employs the unit root test, cointegraion test developed by Johansen and Jesulius (1990) and Vector Error Correction Model (VECM) in order to examine the relationship between macroeconomic indicators and stock prices. The empirical results reveal that there is a cointegrated relationship between the stock price and four selected macroeconomic variables in Vietnam, indicating the presence of long run equilibrium relationship. In the long run, the industrial production and interest rate have significant positive effect on stock prices. In contrast, consumer price index has significant negative impact on stock prices. In the short run, stock prices are only affected by itself and the interest rate at one- month lag. The industrial production index and consumer price index have no effect on stock prices. Furthermore, the findings show that the exchange rate does not influence stock prices in the short run as well as in the long run. Keywords: Stock price, macroeconomic variables, cointegation, VECM 3 TABLE OF CONTENT ACKNOWLEDGEMENTS.ii TABLE OF CONTENT. iii LIST OF FIGURES.vi LIST OF TABLES.vii LIST OF ABBREVIATIONS.ix CHAPTER 1: INTRODUCTION.4 Significance of the research.6 Research methodology and scope.7 CHAPTER 2: LITERATURE REVIEW.1 The top-down approach.2 The dividend valuation model.2 Relationship between industrial production and stock price.3 Relationship between interest rate and stock price.4 Relationship between inflation and stock price.5 Relationship between exchange rate and stock price.24 CHAPTER 3: RESEARCH METHODOLOGY.2 Measurement of variables.3 Data collection and sample size.5 Method of data analysis.1 Unit root test.2 The order of integration.5 Vector Error Correction Model.33 CHAPTER 4: DATA ANALYSIS AND RESULTS.3 Unit root test.1 Optimal lag length selection.1 The long run relationship.2 The short run relationship. 53 CHAPTER 5: CONCLUSIONS AND IMPLICATIONS.3 Limitations and further research.62 6 LIST OF FIGURES Figure 1. VN-Index from January 2001 to May 2013. VN-Index and Industrial Production Index. VN-Index and Interest Rate. VN-Index and CPI. VN-Index and Exchange Rate.25 v LIST OF TABLES Table 3. Description of variables. Result of unit root test at levels. Result of unit root test after first differencing. VAR lag order selection criteria. Result of cointegration test. Result of cointegrating vector. Result of long run relationship. Result of short run relationship. Hypotheses testing summary. Result of autocorrelation. Result of normality test. Result of heteroskedasticity. Result of ADF test for LVN. Result of ADF test for D(LVN). Result of ADF test for LIP. Result of ADF test for D(LIP). Result of ADF test for LIR. Result of ADF test for D(LIR). Result of ADF test for LCPI. Result of ADF test for D(LCPI). Result of ADF test for LEXR. Result of ADF test for D(LEXR). Result of optimal lag length selection. Result of cointegration test. Result of VECM. Result of coefficients of ECM. Serial correlation LM test.80 9 LIST OF ABBREVIATIONS ADF Augmented Dickey Fuller CAPM Capital Asset Pricing Model CPI Consumer Price Index DVM Dividend Valuation Model ECM Error Correction Mechanism ECT Error Correction Term EViews Econometric Views EXR Exchange Rate GDP Gross Domestic Product GNP Gross National Product GSO General Statistic Office HNX-Index Hanoi Stock Price Index HNX Hanoi Stock Exchange HOSE Ho Chi Minh Stock Exchange IFS International Financial Statistics IMF International Monetary Fund IPI Industrial Production Index IPO Initial Public Offering IR Interest Rate OLS Ordinary Least Squared SPSS Statistical Package for the Social Sciences 1 VAR Vector Autoregressive VECM Vector Error Correction Model VNI VN-Index VN-Index Vietnamese Stock Price Index 1 CHAPTER 1: INTRODUCTION This chapter introduces the background of the stock market including the Vietnamese stock market. Next, the research problems and research objectives are identified. Furthermore, the significance and scope of the research are also presented. Finally, the research structure gives an overview of the structure organized in this study.1 Research background It is undeniable the importance of the stock market in the financial system of any economy. In both developed and developing countries, it becomes a significant component of a country’s financial system and plays very important roles in the economy. One of the major roles that the stock market plays is to mobilize the savings. By mobilizing of savings, stock markets help to bridge the gap between savers and investors in an economy. Stock markets provide services and benefits to governments, enterprises, and investors. In fact, governments themselves can issue bonds on the stock market to raise money for infrastructure, or other major projects. As regards the corporations, they are able to make an initial public offering (IPO) on the stock exchange to mobilize new capital for their business. Moreover, the stock market is also a place where investors can diversify their portfolio in order to reduce the risks by investing in different stocks. Stock price, therefore, becomes a matter of general concern of people including 2 government, enterprises, and investors. The question of which factors that affects the stock prices is of serious concern to the investors all over the world. In economic theory, the price is mostly affected by supply and demand relationship. This principle is also true for the stock price. If the demand for a share is greater than its supply, there will be an increase in share price. Conversely, the share price will fall if the supply for a share is higher than the demand. Beyond the basic microeconomic factors such as supply and demand, the relationship between stock prices and macroeconomic variables such as industrial production, interest rates, inflation rates, exchange rate has been the subject of various studies in the field of economy and finance in the last decades. A number of studies carried out in developed market like U.S (Chen, Roll & Ross, 1986) and Japan (Mukherjee & Naka, 1995) reveal that the macroeconomic factors have an impact on stock prices. These studies have paved the way for further examination of similar relations in emerging markets such as Singapore, Thailand, Malaysia, Indonesia and Philippines (Wongbangpo & Sharma, 2002), Vietnam (Hussainey & Ngoc, 2009), and Jordan (El-Nader & Alraimony, 2012). The Vietnamese stock market, which comprises of the Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX), is one of the emerging markets in Asia. The HOSE and HNX were established in July 2000 and March 2005, respectively and they have made significant contributions to the economy. Like other emerging markets in Asia, the Vietnamese stock market is attracting attention as a market that can bring good returns for investors. As the figure 1.1 3 shows, after a period of rapid growth in stock prices from the beginning to the end of 2007, however, there was a significant decline in Vietnamese stock prices from the end of 2007 onwards. The year of 2007 is the year that the Vietnamese stock market was in a stock market bubble. The stock price index reached a peak at 1170.7 points in March 2007. There are many factors leading to the fluctuations in Vietnamese stock price, such as international and domestic economic uncertainty, psychology of investors. Despite the fact that the Vietnamese stock market is potential for investors, there is limited empirical study investigating the relationship between stock prices and economic indicators, especially macroeconomic indicators (Hussainey & Ngoc, 2009). Therefore, the question of whether or not the macroeconomic indicators affect Vietnamese stock prices is also concerned. VN-INDEX 1,200 1,000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Figure 1. VN-Index from January 2001 to May 2013 Source: Ho Chi Minh Stock Exchange (HOSE) 4 1.2 Research problems Many researchers investigate the impact of macroeconomic variables on stock prices and offer evidence that macroeconomic variables affect stock prices such as Chen, et al. However, the findings of these researches are quite different or even opposite in different countries. For instance, Wongbangpo and Sharma (2002) determine a negative relation between interest rate and stock price in Singapore, Thailand and Philippines, but a positive relation is found in Indonesia and Malaysia. Furthermore, there exits limited study regarding the examination of how macroeconomic indicators influence stock prices in emerging markets, especially in Vietnam (Hussainey & Ngoc, 2009). Hussainey and Ngoc also state that their study is the first study that investigates the effects of macroeconomic indicators on Vietnamese stock prices. They believe that their paper provides a significant contribution to the existing literature, as the authors are the first to examine this issue in Vietnam. Nevertheless, the limitation of their study is that this study only examines the impact of two domestic macroeconomic indicators (namely interest rate and industrial production), and international factors (US macroeconomic indicators) on stock prices. Their recommendation is that other macroeconomic variables should be included in the model in order to make the results become more valid.3 Research objectives The main aim of this study is to examine the impact of four key macroeconomic indicators, namely industrial production index, interest rates, inflation rates, and exchange rates on Vietnamese stock prices. More specifically, the purpose of this study is to answer the following questions: ● Do the long run and short run relationship between selected macroeconomic indicators and Vietnamese stock prices exist? ● How do macroeconomic indicators affect the stock price in long run and short run? 1.4 Significance of the research Since the Vietnamese stock market is still immature, it is necessary to have more and more researches into the Vietnamese stock market so that people can understand more about the stock market and help develop the stock market in a sustainable way. By examining the relationship between macroeconomic indicators and stock price, the findings of this paper are expected to offer implications that can help the policy makers, managers of listed companies and investors to predict how the stock price changes if macroeconomic indicators fluctuate. More specifically, based on the results of this study, policy makers can evaluate the impact of their policies, such as fiscal policy, monetary policy on stock market. Therefore, they can formulate better policies that efficiently and timely adjust the Vietnamese stock market. 6 Apart from helping policy makers, the results of this study can help managers of listed companies to understand the impact of external factors on the stock prices of the company and thereby keeping the stock prices steady. Moreover, the findings drawn from this study can help the investors understand more about the volatility of the stock market as a measure of risk. Therefore, they can make the right decision in order to avoid risks and make more profits based on their understanding of macroeconomic information. For instance, if the finding shows that an increase in inflation rate reduces the stock price, the investors should adjust their portfolios by selling the stock and moving to other assets that are more profitable.
