Examining factors affecting stock market performance in Vietnam Abstract ―This paper tests whether innovations in macroeconomic variables are risks that are rewarded in the stock market. Financial theory suggests that the following macroeconomic variables should systematically affect stock market returns: the spread between expected and unexpected inflation, GDP, FDI, exchange rate and money supply. We find that these sources of data are significantly influence on VN-Index.‖ Introduction ―In Vietnam, the change of macroeconomic policies often happens suddenly, thus affecting the psychology of investors, the stock market (stock market) and the general activities of the economy. Therefore, analyzing the impact of macroeconomic factors on the economy in general and the stock market in particular is a necessary and useful thing.
When identifying macroeconomic factors affecting the stock market, it will contribute to solutions to overcome when there are negative impacts of macroeconomic factors on the stock market as well as help develop appropriate stock market with the economic situation.‖ ―This study aims to measure the impact of six macroeconomic factors including: inflation (represented by consumer price index), M2 money supply, VND / USD exchange rate, inflation, total trading volume, gross domestic product and foreign direct investment to stock price indexes are being applied at Vietnam Stock Exchange (VN-Index). Research results show that in the long term exchange rate, foreign direct investment and gross domestic have a negative impact on stock price indexes; With inflation, money supply and total trading volume have a positive impact on most stock price indexes in the long term.‖ ―At present, there are many articles and researches about the impact of macroeconomic factors on the stock market. However, in each time and different conditions, the impact factors and the level of impact on the stock market will not be the same. Especially in the current condition of Vietnam stock market with many companies was listed on stock market, the difference may be very large.‖ ―In order to achieve this goal, the next chapter will present the theoretical basis of the research problem.
After that, the research method and model test results. Finally, comment on research results and conclusions.‖ Key words: Gross Domestic Product, Foreign Direct Investment, Exchange Rate CHAPTER 1: LITERATURE REVIEW ―In Vietnam, the change of macroeconomic policies often happens suddenly, thus affecting the psychology of investors, the stock market and the general activities of the economy. Therefore, analyzing the impact of macroeconomic factors on the economy in general and the stock market in particular is a necessary and useful thing. When identifying macroeconomic factors affecting the stock market, it will contribute to solutions to overcome when there are negative impacts of macroeconomic factors on the stock market as well as help develop appropriate stock market with the economic situation.‖ ―At present, there are many articles and researches about the impact of macroeconomic factors on the stock market.
However, in each time and different conditions, the impact factors and the level of impact on the stock market will not be the same. Especially in the current condition of Vietnam stock market with the introduction of many new indexes in HOSE - Index such as VN30, VNMidcap, VN100, VNSmallcap, VNAllshare, the difference may be very large.‖ ―To achieve this goal, the next section will present the theoretical basis of the research problem. After that, the research method and model test results. Finally, comment on research results and conclusions.‖ ―Moreover, there are many reasons that affect Vietnam stock market and some the most well-known factors are GDP, CPI, FDI, Gold, and FDI… From those, I found there are three important factors that have a strong influence on Vietnam's stock market that are Exchange rate, Inflation, Money Supply, GDP and FDI.
Vietnam Stock Market ―The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges marketplaces which operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities. Inflation ―Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time.
It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods. Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s currency. Money supply ―The money supply is the entire stock of currency and other liquid instruments circulating in a country's economy as of a particular time. The money supply can include cash, coins, and balances held in checking and savings accounts, and other near money substitutes.
Economists analyze the money supply as a key variable to understanding the macroeconomy and guiding macroeconomic policy. FDI ―Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company. Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies.
Exchange rate ―An exchange rate is the value of one nation's currency versus the currency of another nation or economic zone. For example, how many U. dollars does it take to buy one euro? As of February 23, 2019, the exchange rate is 1.13, meaning it takes $1. GDP ―Gross Domestic Product (GDP) is a broad measurement of a nation’s overall economic activity.
GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.‖ ―GDP includes all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted). It may be contrasted with Gross National Product (GNP), which measures the overall production of an economy's citizens, including those living abroad, while domestic production by foreigners is excluded. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well (in the United States, for example, the government releases an annualized GDP estimate for each quarter and also for an entire year). Impact of different factors on performance of stock market 1.
Inflation ―The relationship between stock market performance and inflation is imperative for investors because stocks are expected to provide protection from the effects of inflation (Mbulawa, 2015). However, A number of researches conducted to examine the effect of inflation on stock returns in both developed and developing economies around the world have provide mixed findings on the connection between inflation and stock market returns. For instance, Fama and Schwert (1977) found a negative relationship between the performance of the stock market and inflation. Some significant studies from Pearce and Roley (1985) and Hardouvelis (1988) showed no significant correlation between the stock returns and inflation and this proves that there is need for further exploration into the topic.
To seek clarity on the relationship between inflation and stock price movements, further research must be done to investigate the behavior of the two variables. This study intends to address the question: what is the effect of inflation on stock market returns in the VSM? There are a wide range of researches showed that how inflation affects on stock market. For example, in 1977, Fama and Schwert found a relationship between inflation and the stock market. The author used expected inflation and expected inflation to consider the impact of inflation on the stock price index and the results show that there is a negative impact of inflation on stock prices.
Mohammed Omran and John Pointon (2001) also found negative impacts of inflation on the Egyptian stock market in the short and long term. In 2011, Adel Al Sharkas and Marwan Alzoybi conducted research on the subject of ―Stock prices and inflation; Experimental evidence in countries such as Jordan, Saudi Arabia, Kuwait, Morocco‖. With the VAR model, the author supported the hypothesis of the long-term impact of inflation and stock prices. Mahedi (2013) based on market efficiency inflation influences stock indices, where; when the inflation rate is higher than expected, which is economically bad news, implies meaningful impact of stock returns.‖ ―A study by Alimi (2014) also examined the long run and short run relationships between inflation and the financial sector development in Nigeria over the period between 1970 and 2012.
The findings of the study found that that inflation presented deleterious effects on financial development over the study period. Taofik and Omosola (2013) explored the relationships and dynamic interactions between stock returns and inflation in Nigeria and revealed the existence of a long run relationship between stock returns and inflation. Ahmad and Naseem (2011) examined the impact of high inflation on stock market returns in Pakistan using monthly data of inflation and stock returns and found that there is negative and significant impact of inflation on stock returns. Krylova & Vahamaa (2004) examined the impact of inflation and economic growth expectations and perceived stock market uncertainty and established that stock and bond prices move in the same direction during periods of high inflation expectations, while epochs of negative stock-bond return correlation seem to coincide with the lowest levels of inflation expectations.
In their study, Kullapornand Lalita (2010) also investigated the relationship between inflation and stock prices in Thailand andalso explored the impact of specific events and revealed that that movement of stock prices is irrelevant to inflation. Kaul (1987) explains that the relationship between inflation and stock returns varies over the time in a systematic way. He determines that this relationship is caused by money demand and supply factors. Pérez de Gracia and Cuñado (1999) analyze the relationship between inflation and common stock returns during the 1941-1999 in Spain, corroborating the existence of Granger causality relationship between inflation and stock returns and, therefore, they disagree with Geske, Roll, and Fama: this relationship cannot be spurious.
Other alternative explanation is the theoretical ―Rational Expectations Equilibrium Model‖ of assets prices of Veronesi (1999). He concludes that stock prices overreact to bad news when the state of the economy is good and underreact to good news when the state of the economy is bad. It occurs because when the announcements go against the market tendency, the investor’s uncertainty increases and, therefore, the volatility of the market also increase.‖ ―On the other hand, a recent paper of Li et al. (2010) suggests that the relationship between inflation and stock returns varies depending on the economy goes through high or low inflation periods.
Estep and Hanson (1980) propose that this relationship could be neutral because the companies can transfer the increases of inflation to the prices of their products. This theory is known as ―Flow – Through‖ hypothesis (Jareño, 2005, and Jareño and Navarro, 2010). They conclude that the companies with a higher flow – through ability are less affected by changes in inflation rate. Therefore, the negative effect of a rise in inflation on a firm is inversely related with its flow – through ability.
Díaz and Jareño (2009 and 2013) deal to explain the impact of inflation news on stock prices taking into account, on one hand, the Veronesi’s hypothesis and, on the other hand, the Estep and Hanson’s ―flow – through hypothesis‖. Firstly, they analyze the short run response of each sector of Spanish economy to unanticipated component of inflation announcements, and secondly, they study the potential explanatory factors of each response. They observe different reactions to unexpected inflation depending on the direction of the news and the state of the economy.