ECONOMETRICS TOPIC MONETARY POLICY AND STOCK PRICE VIETNAM STOCK MARKET

FOREIGN TRADE UNIVERSITY HO CHI MINH CAMPUS ECONOMETRICS TOPIC: MONETARY POLICY AND STOCK PRICE/ VIETNAM STOCK MARKET Group Name and student’s ID: Lục Huệ Tâm – 2011116552 Bùi Hà Nhi – 2011116501 Văn Hạnh Nhân – 2011116498 Nguyễn Khánh Toàn – 2011115608 Trần Đinh Vũ – 2011116627 Nguyễn Ngọc Yến Nhi - 2011116510 Class: K59CLC6 Class code: 73 Instructor: Lê Hằng Mỹ Hạnh Group Table of Contents Table of figure a Chapter INTRODUCTION .1 1.1 Rationale of the study .1 1.2 Aims and objectives of the study 1.3 Research subject: 1.4 Research question: 1.5 Research structure: Chapter LITERATURE REVIEW .2 2.1 Relationship between Monetary policy and Stock market in the world: 2.2 Relationship between Monetary policy and Stock market in Vietnam: Chapter DATA AND METHODOLGY .6 3.1 Regression model: 3.2 Variable definition and expectation Chapter RESULTS AND ANALYSIS .10 4.1 Test for multicollinearity 10 4.2 Test for heteroskedasticity 11 4.3 Regression model results: .12 4.3.1 One variable .12 4.3.2 Two variables: 12 4.3.2.1 LINF and LM2 13 4.3.2.2 LINF and LSTI 13 4.3.3 Three variables: 14 Chapter CONCLUSION 15 A Group Table of figure Figure 3-1 sum LNVI LINF LSTI LM2 10 Figure 4-1 correlate LVN LINF LSTI LM2 11 Figure 4-2 reg luhatsq LM2 11 Figure 4-3 reg LVNT LINF 12 Figure 4-4 reg LVNI LINF LM2 13 Figure 4-5 reg LVNI LINF LSTI 14 Figure 4-6 reg LVNI LINF LM2 LSTI 14 a Group Chapter INTRODUCTION 1.1 Rationale of the study Monetary policy is the practice of stabilizing the currency through the use of credit and foreign exchange transactions, consequently stabilizing the economy and supporting growth and development The central bank is the body in charge of carrying out monetary policy Price stability, GDP growth, and unemployment reduction are the goals of monetary policy Monetary policy becomes an effective economic stabilizing instrument for the government since it has the potential to alter the money market, consequently affecting aggregate demand and output The stock market, often known as the stock exchange, is a venue where investors can issue, buy, sell, and exchange various types of securities This is typically done at the stock exchange or through securities brokerage firms Nowadays, the relationship between money policy and the stock market has been researched deeply by many investors and researchers Moreover, stock prices are assumed to be controlled by a variety of macroeconomic variables such as interest rates, inflation, and money supply, all of which are influenced by various economic policies The central bank must figure out how monetary variables like inflation, money supply, and interest rates affect stock market performance Therefore, in this research, we will focus on analyzing the relationship between these two main factors: money policy and stock market 1.2 Aims and objectives of the study The purpose of this study is to define the connection between monetary policy variables and stock prices on the Vietnamese stock market using an OLS linear regression model to analyze the impact of stock price fluctuations Group 1.3 Research subject: Monetary policy, stock price and stock market in Vietnam as well as the relationship of factors derived from monetary policy and stock prices on the Vietnamese stock market based on the use of OLS linear regression model 1.4 Research question: This research will focus on answering the main question: How will the variables in the model affect the general stock market of Vietnam with other variables related to monetary policy? 1.5 Research structure: The research is included main chapters: Chapter 1: Introduction - A brief statement about the purpose of the study Chapter 2: Literature review - Analysis of some relevant published literature Chapter 3: Methodology and data - Introduction of the model and description of data Chapter 4: Results - Estimation results are provided in a table and discussed in this section Chapter 5: Conclusions Chapter LITERATURE REVIEW 2.1 Relationship between Monetary policy and Stock market in the world: The relationship between monetary policy and the stock market performance has been a subject of interest among economists and policymakers over a long period of time The existing literature provides a number of theories demonstrating the relation between stock market and economic activity proxied by different macroeconomic variables On the basis of some asset price channels of the monetary policy transmission mechanism, it is generally agreed that restrictive monetary policy leads to lower stock prices and Group expansionary monetary policy leads to higher stock prices Through monetary policy, the Central bank not only influences interest rates but also inflation expectations An unanticipated rise in inflation may lead to a decline in stock prices, as expectations of more restrictive monetary policy will increase To determine the effect of monetary policy on stock and bond return, Booth and Booth used two variables of monetary policy The findings of their study show that a decrease in monthly return of both large and small bond and stock portfolios is associated with a restrictive monetary policy Using monthly data from 1971 to 1990, Mukherjee and Naka studied the association between stock prices and macroeconomic variables including money supply, inflation, index of industrial production, exchange rate and interest rates in Tokyo Stock market Patelis examines whether some portion of the observed predictability is in excess US stock returns can be attributed to shifts in the monetary policy stance He finds that monetary policy variables are significant predictors of future returns, although they cannot account fully for the observed stock return predictability Patelis’ explanation for the finding that monetary policy indicators are significant predictors of excess stock returns relates to the financial propagation mechanism and to the credit channel of monetary policy transmission Jensen and Johnson also find that monetary policy developments are associated with patterns in stock returns This argument is based on Waud’s suggestion that discount rate changes affect market participants’ expectations about monetary policy Since rate changes are made only at substantial intervals, they represent a somewhat discontinuous instrument of monetary policy, and they are established by a public body perceived as being competent in judging the economy’s cash and credit needs French analysis by suggesting that the monetary environment affects investors’ behaviour The monetary policy stance is proxied by a binary dummy variable indicating discount rate changes find that predictable variation in stock returns depends on monetary as well as business conditions, with expected stock returns being higher in tight Group money periods than in easy money periods They find that stock returns in twelve OECD countries over the period 1956-1995 are generally higher in the expansive US and local monetary environments than they are in restrictive environments 2.2 Relationship between Monetary policy and Stock market in Vietnam: For some brief on Vietnam’s monetary policy: in the late 1980s, following Doi Moi policy, Vietnam shifted from a centralized economy controlled by the government to a more open market economy with a “socialist orientation” The new policy encouraged and gave incentives to private businesses and overseas investment, including foreignowned enterprises Over 30,000 private businesses had been established by the late 1990s and there were apparent improvements in agriculture reforms The strategy has proven a success as real GDP grew at an average rate of 7.4% from 1991 to 2010, and per capita real GDP almost doubled from 1993 to 2009 The growth was driven by domestic investment, foreign investment and exports The poverty rate also witnessed a decline during the past two decades (World Bank) Vietnam is expected to grow as one of the important industrial economies by 2025 as the country embraces a recent healthy growth path, a young and educated working population, rich natural resources and its willingness to develop and internationalize During the period 2000–to 2015, Vietnam's economy witnessed many strong movements, especially the impact of the crisis in the region and the world This required the Government to adopt flexible, effective macroeconomic policies in a timely manner to help the national economy overcome difficulties and achieve the targets of growth in each period As a result, the economic growth rate decreased from 8.48% to 6.31% Besides, the prioritized target in this period was to control inflation – a consequence of the increase in aggregate demand in the previous period The period 2010–2012 witnessed fluctuations in the stock price Vietnam index due to the situation in the country and internationally, such as the European debt crisis or high inflation, unstable exchange rates However, the stock market began to recover Group powerfully in 2013 when the inflation rate was controlled, interest rates were reduced, foreign reserves increased and the deployment of securities tax-deductible transfer solutions So, 2013 can be considered as an establishment for the stabilization of the market in 2014 However, many market sessions still declined due to the impact of events in the South In 2015, the macroeconomic condition was more positive; however, the stock market experienced a fluctuation, the growth of the Index was 5% due to the influence of external factors, the strongest ones were the exchange rate fluctuations and the fall in oil prices Besides those changes, the undeniable growth of Vietnam's stock market after more than 15 years of operation made remarkable progress with a market capitalization of over 1.3 million billion dongs, equivalent to 34% of GDP with average trading per session reaching 4.964 billion with 682 stocks listed on the two trading centers Studies have shown that interest has an opposite impact on the stock price At the second rank, exchange rate policy can help investors to forecast the market change through the exchange rate policies of central banks Some studies also examined the impact of the money supply on the stock price, it showed a positive relationship between the money supply and the US stock market Existing research into the determinants of volatility of stock exchange highlights such factors of monetary policy as interest rate, required reserves, money supply, exchange rate, etc It appears that a frequently applied method to determine the relationship between monetary policy and the stock market is the vector autoregressive model, as in Liljeblom and Stenius, Zakaria and Shamsuddin, and Hussin et al Using VAR, similarly, Al-Raimony and El-Nader identify the cause of Jordan’s market volatility between 1991 and 2010 Accordingly, volatility has been a subject of existing research, yet the study of conditional volatility has been attracting the attention of many researchers, especially when the world economy experienced wide upheavals Thus, the investigation into stock Group market volatility and its determinants is crucial in controlling market risks and contributes to economic stability and sustainable development Chapter DATA AND METHODOLGY 3.1 Regression model: The goal of this research is to establish the relationship of factors derived from monetary policy and stock prices on the Vietnamese stock market based on the use of OLS linear regression model to analyze the impact of changes in stock prices How will the variables in the model affect the general stock market of Vietnam with other variables related to monetary policy? The data sources used were all provided by verified sources and reviewed by the research team The time period included in the study was taken from January 2018 to April 2021 by the research team and includes data related to the variables used in the paper Our research model is based on DewanMuktadir-Al-Mukit and A.Z.M Shafiullah (2012) research from Dhaka, Bangladesh (2012) The original regression model is achieved with OLS, consists of dependent variable which are monthly Inflation rate (INF), Broad money supply (M2), Treasury bill (Tbill) and Repo rate (REPO), while the dependent variable Y is DSGEN (Dhaka general index), with the purpose of indicate the overall situation of the stock market at Dhaka But due to the lack of information on the REPO rate in the Vietnam market (information security or scarcity in information resources), we decided to deduct this variable from the model As for treasury bills, the main purpose of this is to act as a proxy of short term interest rate, so we instead use the variable “short-term interest rate” The Sample regression function that we inherit from structural models of empirical researches will choose VN-Index as independent variable (Y = VNI) and dependent variables (INF, M2 , STI) VNI= β1 + β2INF + β3M2 + β4STI + Ui (PRF) Group VNI  = β 1 + β 2INF  + β 3M2  + β 4STI+U  i (SRF) In the PRF model, β1 is the intercept of the model which helps the model to operate functionally, but has no economic meaning β2, β3, β4 are the parameters indicating the slope of coefficients of variables VNI, M2 and STI Ui is the stochastic error And for the SRF, we have all estimators of coefficients of the previous PRF model And according to empirical research ( DewanMuktadir-Al-Mukit and A.Z.M Shafiullah (2012) ), we will also transform log our model to smoothen out the data and to reduce heteroskedasticity: LVNI  = β 1 + β 2LINF  + β 3LM2  + β 4LSTI+U  i 3.2 Variable definition and expectation In this part, we will go into description of each variable in the model and our expected impact of the dependent variables to the independent variable The table 3.1 will include the variable full name, unit scale, symbol, explanation and the web source of each observation: Variable Symbol Explanation Source VN-Index VNI VnIndex shows stock price fluctuations traded at Cafef.vn Ho Chi Minh City Stock Exchange Good Unit: Point Inflation rate of indication for overall vietnam stock market INF The inflation rate is the percentage change in the tradingeconomic Vietnam price index for a given period compared to the s.com (monthly) previous period This will help alert fluctuation in overall price, specifically stock price in this Unit: % research Broad money M2 Broad money supply is the quantity of money ceicdata.com Group supply M2 available circulating in an economy controlled by Vietnam monetary policies This quantity includes all (monthly) cash, checking deposits, savings deposits and other money market securities Unit: $ Vietnam Short- STI Interest rates on loan contracts or debt term interest instruments with maturities of less than one year, rate(monthly) such as treasury bills, bank certificates of deposit, ceicdata.com or commercial paper Unit:% Table : Summary of variables And before we go into the results of the research, we will first summarize the expected impact of each variable to have a bigger scope of comparison to the past researches In table 3.2, we will go over the sign of impact (positive or negative) and provide empirical research or past reports that encourage or against the signs of the coefficients Please take note that this is just a speculation of the effect of the impact and it will only concern the signs of the effect, not the mass of significance yet Variable Expected effect to VNI Past research INF +/- Dinh Tran Ngoc Huy, Pham Minh Dat and Pham Tuan Anh (2020) Phan Thi Bich Nguyet and Pham Duong Phuong Thao (2013) M2 +/- - Sara Alatiqi and Shokoofeh Fazel (JOURNAL FOR ECONOMIC EDUCATORS, 8(2), FALL 2008) STI - - Nguyen Hoang Lan (2015) Table : Expected Impact of dependent variables Group Inflation rate can immediately have a negative impact on the stock market because when the inflation rate increases, the input costs of business will rise Moreover, inflation also affects behaviors of investors as well as the investment value in the stock market In the long term, inflation may have a positive effect according to Phan Thi Bich Nguyet and Pham Duong Phuong Thao (2013) However, the data is usually really low which makes it hard to depict the precise impact of inflation rate on the stock market Money supply M2 can have either a positive or negative impact on the stock market In most cases, because Money supply and interest rate have a negative relation between each other and interest rate with stock price also have negative relations, so people biasly accept that if there is an increase in money supply then it will positively affect the stock price However, research of Sara Alatiqi and Shokoofeh Fazel (2008) on the subject of money supply related to predicting stock price In their research results, they have argued that there is no significant long-term causal relationship between money supply and stock prices, mainly because of the unstable relations between money supply and interest rate (which means that a money supply increase doesn’t always have a negative impact on interest rate, so the impact on the stock market is unknown) STI is expected to have a negative impact on the stock market price However, the effect can be really small and neglectable In accordance with the past research of Nguyen Hoang Lan (2015), treasury bills - an example of STI, don't directly slow down the performance of the financial market In contrast, the more the positive the stock market operates, the more encouraged the central bank is to lower the treasury bills The mild decrease in the stock price was assumed to be affected by the change in investor’s psychology and businesses’ spending when the interest rate of any kind rises This is why we forecast the STI to have a negative effect on the stock price, yet the changes can be small 3.3 Summary of dependent variable Group Figure 3-1 sum LNVI LINF LSTI LM2 From the table above, we observe that based on a total of 39 samples, LINF and LSTI variables have the highest Std.Dev (approximately 0.60 and 0.37), which means high standard deviation indicates data are more spread out from the mean Along with that, the wide fluctuation range (from Min to Max) of the variables also indicates that the LINF variable has the largest value range (approximately 3.52), this result indicates that indicate the range of fluctuation of LINF, which can have a significant impact on LVNI as we have known that inflation is one of the main aspects that control the stock market from theories and empirical research Chapter RESULTS AND ANALYSIS 4.1 Test for multicollinearity Figure 4-2 correlate LVN LINF LSTI LM2 With the rule of thumb of correlation not exceeding 0.8, we can check for the existence of multicollinearity among independent variables, with the result of the correlation analysis above As none of the correlation coefficients between LNIF, LM2 and LSTI are greater than 0.80, no multicollinearity problem exists in the model About 10 Group the correlation among the variables, we can see that LM2 and LSTI are the most strongly correlated variables with the correlation of -0.5943 On the other hand, LM2 and LVNI seems to have very little correlation with each other at only -0.0371 4.2 Test for heteroskedasticity Figure 4-3 reg luhatsq LM2 To test for heteroskedasticity, we use the Park test to identify every variable And from the tests between LM2 with luhatsq, we see that t for LM2 is 2.93, which exceeds This means that there is a significant relationship between two variables, hence we conclude that heteroskedasticity exists in the error variance However, by transforming log the model, we have mitigated the overall effect of heteroskedasticity onto our model 4.3 Regression model results: 4.3.1 One variable After running the data of variables into simple regressions, we have noticed that LM2 and LSTI have really small R-Squared compared to LINF Furthermore, LM2 and LSTI have high P-value (0.12 and 0.823), which easily lead to not being able to reject the null hypothesis of having insignificant effect on LVNI separately In this case, we will choose to look further into the LINF, which has a much higher R-Squared of nearly 0.2 11 Group Figure 4-4 reg LVNT LINF VNI  = 6.962 + -0.09 LINF From the regression data above, we notice the sign of the coefficient is minus This indicates that the change in LINF has a significant effect on LVNI More specifically, a 1% increase in Inflation rate can lead to a 0.09% decrease in LVNI In terms of numbers, the effect looks very small, but since these are calculated in percentage change, and with the P-Value of only 0.005, this proves that the variable LINF has a statistically great effect on LVNI at 1% and 5% significance level 4.3.2 Two variables: Since we have chosen LINF as the main source of significant effect on LVNI, we will continue to add LM2 and LSTI one at a time into the current model that have LVNI and LINF to see if these two variables help signify the result and increase the economic meaning of the model 12 Group 4.3.2.1 LINF and LM2 Figure 4-5 reg LVNI LINF LM2 LVNI  = 11.69 - 0.118 LINF - 0.3635 LM2 In this regression model with dependent variables LINF and LM2, we see immediately an increase in adjusted R-squared from 0.1757 to 0.2290 This means that though the variable LM2 alone does not have significant impact on LVNI, but by putting it into the model with LVNI and LINF, it can still help with the explanation of the fluctuation of LVNI Furthermore, both LINF and LM2 have a significant impact at 10% significance level, while only LINF still have a great impact on LVNI at 5% and 1% significance level 4.3.2.2 LINF and LSTI Figure 4-6 reg LVNI LINF LSTI 13 Group LVNI  = 7.003 - 0.082LINF - 0.04LSTI The regression model above shows us that with the variable LSTI added, the adjusted R-squared value falls from 0.1757 to 0.1667 Thus, we can say that the variable LSTI does not help with the explanation of independent variable LVNI whether when we analyze it alone or when we consider it along with a significant dependent variable like LINF In this scenario, while LINF has a great impact on the value of LVNI even with the significance level of 10% or 5%, the variable LSTI does not have any considerable impact on LVNI 4.3.3 Three variables: Figure 4-7 reg LVNI LINF LM2 LSTI LVNI  = 15.1488 -0.1127LINF - 0.62LM2 - 0.1243LSTI The complete structural model indicated that LINF, LM2 and LSTI have negative impact on the LVNI, with the percentage of explanation at Adj R-squared 30.68% This increase in adjusted R-Squared also shows that the variable LSTI also helps with the function of explaining for variable LVNI The relationship between independent variables and dependent variables is all significant at the 5% significance level The equation above implies that a 1% increase in Inflation rate, broad money supply and short-term interest rate contributes to a decrease of 0.1127%, 0.62% and 0.1243% in LVNI respectively 14 Group These signs of the coefficients have all been according to the prediction of expected signs from the methodology and data chapter With LNIF and LSTI giving negative impact in short-terms being quite understandable (from economic theory and empirical researches), the only variable left is LM2 Our team’s explanation on the negative signs on the coefficient of LM2 is through the time series of the observation, which is in 2019-2020 and 2020-2021 This timeframe is mainly manipulated by the main crisis of Covid-19 This pandemic discourages the consumption and investment in goods and services as well as the stock market The monetary policy of Vietnam helps encourage investment through increasing money supply to decrease interest rate and make it more affordable to consume and invest However, the investor's conscience still leans towards non-risky investment and the consumers fear of spending if the pandemic gets extended All of those factors might have put the real interest rate at the same pace or worse than before the monetary policy, hence leaving a negative impact on the stock price and its market Chapter CONCLUSION The final results of our group’s research are consistent with the expectation derived from the empirical research According to the model, analysis, and the results in previous parts, all variables (LINF, LM2 and LSTI) have a negative impact on VNI and stock market In particular, The relationships between independent variables and dependent variables are all significant at the 5% significance level A 1% increase in Inflation rate, broad money supply and short-term interest rate contributes to a decrease of 0.1127, 0.62% and 0.1243% in LVNI, respectively However, this study still has some limitations in terms of data analysis For example, heteroskedasticity is not completely eliminated There are also difficulties in collecting samples, for example, our group had to entirely remove the variable repo rate as such data is quite inaccessible in Vietnam The results from our research still indicate economic meanings, so the following researchers can still carry out some improvements in the model forming stage 15 Group References: Nguyen, T H (2012) Momentum effect in the Vietnamese stock market ScienceDirect.com Retrieved April 23, 2022, from https://www.sciencedirect.com/sdfe/reader/pii/S2212567112000780/pdf Dang Thi Quynh, A (2018) IMPACTS OF MONEY POLICY ON STOCK MARKET IN VIETNAM Retrieved April 23, 2022, from https://d1wqtxts1xzle7.cloudfront.net/57604423/LA01.070_Tac_d%E1%BB %99ng_c%E1%BB%A7a_chinh_sach_ti%E1%BB%81n_t%E1%BB%87_d %E1% DewanMuktadir-Al-Mukit, A Z M Shafiullah (2012) Does monetary policy have impact on stock market performance? 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Van Duy Nguyen (1970, January 1) Impacts of monetary policy and information shock on stock market: Case International Journal of Economics and Finance Retrieved April 23, 2022, from https://ideas.repec.org/a/ibn/ijefaa/v8y2016i7p132.html 18 Zimmermann@stlouisfed.org, & Dinh Tran Ngoc Huy & Bui Thi Thu Loan & Pham Tuan Anh (1970, January 1) Impact of selected factors on stock price: A case study of vietcombank Entrepreneurship and Sustainability Issues Retrieved April 23, 2022, from https://ideas.repec.org/a/ssi/jouesi/v7y2020i4p2715-2730.html iii ... of stock price fluctuations Group 1.3 Research subject: Monetary policy, stock price and stock market in Vietnam as well as the relationship of factors derived from monetary policy and stock prices... policy and stock market 1.2 Aims and objectives of the study The purpose of this study is to define the connection between monetary policy variables and stock prices on the Vietnamese stock market. .. .2 2.1 Relationship between Monetary policy and Stock market in the world: 2.2 Relationship between Monetary policy and Stock market in Vietnam: Chapter DATA AND METHODOLGY .6 3.1