INTRODUCTION
Rationales of research
The United States is a significant trading partner for numerous developed and developing nations across Asia and globally Consequently, any changes or events affecting the U.S economy can have widespread implications for international trade dynamics.
The US economy significantly influences the economies of various Asian countries due to the interconnectedness of global markets, driven by the liberalization of capital markets and the complexity of financial instruments Financial experts assert that fluctuations in the US stock market can impact stock markets worldwide, including the Nikkei 225 in Japan and the Hang Seng in Hong Kong, which tend to closely follow the S&P 500 However, some studies suggest that the Vietnamese stock market remains relatively insulated from movements in the US and regional markets.
Research on regional stock market linkages is crucial for investors, particularly in the Asian region, which is susceptible to financial shocks that can have widespread effects The interdependence of these countries becomes a significant concern during financial crises, as evidenced by the 1997 Asian financial crisis, which started with the collapse of the Thai baht and led to a ripple effect across Hong Kong and other markets This scenario highlights the increased co-movement among Asian financial markets Consequently, it raises important questions about how the 2007-2010 international financial crisis may have altered the interrelationships between the Vietnam stock market, the US market, and other regional markets in both the short and long term.
In today's globalized economy, understanding the structure of international stock markets is crucial for both investors and portfolio managers Financial theories emphasize the importance of maintaining a well-diversified portfolio to mitigate risk, especially as investors become increasingly risk averse For international investors seeking opportunities across various stock markets, it is essential to recognize whether diversification will yield significant gains However, the growing co-movement of financial markets worldwide has diminished the benefits of diversification, as investors flock to developing countries in search of higher returns When stock markets in different nations move in tandem, the potential for long-term gains through diversification is significantly reduced Therefore, research on stock market integration is particularly relevant, especially in the context of rapidly growing Asian economies, providing valuable insights for investors, portfolio managers, corporate executives, and policymakers.
Despite extensive research on developed markets and certain Southeast Asian economies, studies specifically focusing on the Vietnam stock market, particularly during the 2007-2010 international financial crisis, remain scarce This paper aims to explore the long and short-term interrelationships among Vietnam, the US, and other relevant Asian stock markets before and during the crisis period Our research seeks to enhance existing literature by offering new empirical evidence on this important topic.
Problem statements
Vietnam became the 150th member of the WTO on January 11, 2007, marking a significant step in its economic integration Following its accession, Vietnam began to liberalize its financial market by the end of 2007, positioning itself as a key player in the global economy Changes in Vietnam's economy can influence regional and global markets, while international economic shifts also impact Vietnam The stock market is no exception to this dynamic Some researchers argue that the Vietnamese stock market operates independently from global markets, while others assert it is influenced by the US and regional stock markets Additionally, many investors in Vietnam exhibit crowd psychology, known as “tam ly dam dong,” which affects their investment decisions.
As a result, not many investors pay attention to the region or world stock market’s fluctuation
The financial integration and cointegration of emerging stock markets with developed markets have garnered significant attention from policymakers and finance researchers Recent advancements in emerging stock markets, particularly in developing countries, can be attributed to factors such as stock market reforms, financial liberalization, and effective economic policies A crucial aspect of this research highlights the rising influx of funds from developed markets, including the US and Japan, into developing markets like Vietnam, Hong Kong, and China, thereby enhancing their importance in portfolio management.
This research aims to examine the relationship between Vietnam, the US, and other Asian stock markets, providing valuable insights for investors, policymakers, and academic scholars.
Research objectives and research questions
Research objectives represent the researcher's vision regarding the research problem, outlining the purpose of the study in measurable and clearly defined terms, as noted by Zikmund (1997) To address the research problems effectively, this study aims to accomplish specific objectives.
This research aims to analyze the interconnectedness of stock markets in Vietnam, the US, Singapore, Hong Kong, China, and Japan, utilizing daily data from January 1, 2005, to June 30, 2010.
The second objective is to evaluate the level of stock markets integration and how these stock markets affect together
The third objective focuses on analyzing the impact of the 2007-2010 financial crisis on integration trends This analysis enables investors to anticipate the fluctuations of the Vietnamese stock market in relation to global and regional market movements Additionally, it provides policymakers with valuable insights to formulate effective strategies during international crises.
Final objective is to suggest investment and policy advice
Research questions serve as the bridge between identifying a problem and the need for investigation, as highlighted by Zikmund (1997) In alignment with the research problems and objectives, this study aims to address specific inquiries to derive meaningful answers.
Question 1: Is there a relationship between Vietnam and Asian stock market with
US stock market? (Answer in part VI)
Question 2: Is there a relationship between Vietnam stock market & related Asian stock markets of Singapore, Hong Kong, China and Japan? (Answer in part VI)
Question 3: Is there a cause-effect relationship between these stock markets? How the relationship changes before and during the global financial crisis of 2007-2010? (Answer in VI)
Scope and methodology
This research investigates the relationship between Vietnam, the United States, and the regional stock markets in Asia, focusing on representative countries such as Singapore, Hong Kong, China, and Japan The study analyzes the dynamics of these stock markets during the international financial crisis from 2007 to 2010, utilizing data from 2005 to June 2010 Expanding the selection of countries and extending the time frame could yield more accurate and compelling results.
To effectively address research problems and meet objectives, selecting and implementing appropriate methodologies is crucial This approach is guided by theoretical frameworks from the literature review and insights from Brooks.
(2008), we apply some following methodologies and econometric testings as a brief description:
• Carrying out a review of the relevant theoretical literature and empirical literature
• Getting daily data of each index from yahoo.finance website from 2005 to June 2010
• Conducting data descriptive statistics (summary basic statistic and simple correlation estimation) Some of basic statistic tests are mean, median, standard deviation, skewness, kurtosis and others
• Applying the test for stationary with three tests: The Dickey-Fuller test (DF), The Augmented Dickey-Fuller test (ADF) and The Phillips-Perron test (PP)
• Performing the Johansen cointegration test to test for cointegration amongstst the sample stock markets
• Carrying out the Granger causality test to find the causal effect amongstst these markets
• Executing the test of converging trend to identify the converging or diverging trend of variables
• Implementing variance decomposition analysis to identify exogenous and endogenous variable
Above methodologies are test by the Eview 6 software Part 3 will mention detail of each above methodologies
IV Data and data description
Structure of research
This thesis deviates from the conventional structure typically seen in Vietnam, as each issue is not substantial enough to warrant a full chapter; instead, we divide them into sections Conducted as an empirical study, this research utilizes models from the literature review that have been tested in other countries, making it one of the pioneering studies to apply these tests in Vietnam The research comprises six parts: Part 1 introduces the study, outlining the rationale, problem statements, objectives, research questions, scope, and methodologies Part 2 presents the literature review, while Part 3 details the methodologies employed Data collection and description are covered in Part 4, followed by empirical results in Part 5 Finally, Part 6 concludes with research findings and implications, with the relationship between the sections illustrated in Figure 1.1: Structure of Research.
METHODOLOGY
Johansen Cointegration test
The Johansen test is a statistical procedure used to test for cointegration among multiple I(1) time series Building on Engle and Granger's (1987) findings, which state that while individual economic series may only be stationary after differencing, a linear combination of their levels can be stationary, indicating cointegration Unlike the Engle-Granger test, which focuses on a single cointegrating relationship, the Johansen test allows for multiple cointegrating relationships, making it more versatile Proposed by Johansen in 1988 and further developed with Juselius in 1990, this test utilizes a maximum likelihood method to estimate long-run equilibrium relationships and derive likelihood ratio tests for cointegration There are two variations of the Johansen test: the trace test and the eigenvalue test, with the null hypothesis for the trace test being r ≤ n and for the eigenvalue test, r = n.
This thesis aims to investigate the long-run relationships, or cointegration, among the stock markets within the analyzed sample Prior to performing the cointegration test, it is essential to assess the stationarity of time series variables through a unit root test.
An econometric model of cointegration necessitates understanding the stationarity and order of integration of time series variables For cointegration to occur, all analyzed time series must be integrated of the same order or exhibit a deterministic trend (Granger, 1986) Therefore, it is essential to assess the order of integration of each stock index before performing a cointegration analysis of stock markets Various methods exist for testing stationarity, including visual data plots, the autocorrelation function, and the unit root test, which is the most commonly used method This study applies the unit root test, utilizing three prevalent tests: the Dickey-Fuller test (Dickey and Fuller, 1979; Fuller, 1976), the Augmented Dickey-Fuller test (1979, 1981), and the Phillips Perron test (1988) These tests have been employed in prior research (V.X Vinh, 2009; David, 2001) The detection of a unit root indicates that the time series data is non-stationary, necessitating differencing the data d times or integrating it of order d (I(d)) to achieve stationarity The cointegration procedure requires that the variables are stationary at the first difference, I(1).
1.1.1 The Dickey-Fuller test (DF)
To apply the DF test, let consider a simple autoregression:
In the analysis of non-stationary time series, the variable y represents the series under consideration, while ρ and δ are the parameters that need to be estimated The optional exogenous regressors, denoted as x_t, may include a constant or both a constant and a trend The error term, ε_t, consists of independent normal random variables with a mean of zero and constant variance A time series y_t is classified as non-stationary and possesses a unit root when the absolute value of ρ equals one; conversely, if the absolute value of ρ is less than one, the series is stationary Therefore, the primary objective of conducting a unit root test is to evaluate the null hypothesis that ρ equals one.
To apply the standard DF test, we subtract y t − 1 from both sides of the equation (1) Equation (1) becomes:
So null hypothesis and alternative hypothesis are:
Above hypothesises can be evaluated using the conventional t-ratio t α ( ) ˆ
SE ˆ α α Where t α is a t-ratio forα, αˆ is the estimate of α and SE ( ) α ˆ is the coefficient standard error
1.1.2 The Augmented Dickey-Fuller test (ADF)
The validity of the DF test relies on the assumption that ε t represents white noise If the dependent variables in equation (2) exhibit autocorrelation, then ε t will also display autocorrelation To address this issue, Said and Dickey (1984) enhanced the test by incorporating p lags of the dependent variable y into the right-hand side of equation (2).
In the ADF test, the same null hypothesis (H0: α=0) and alternative hypothesis (H1: α