Financial system in viet nam

FACULTY OF MANAGEMENT AND TOURISM FINANCIAL SYSTEM PROJECT FINANCIAL SYSTEM MARKET FORM & EFFICIENCY Tutor name: Ms Nguyen Thanh Loan Tutorial class: Tut BA11 Students: Nguyễn Thu Hà Lê Thị Thanh Huyền Trần Thị Hoài Phương Hoàng Thị Thanh Thúy Vương Kim Yến Hanoi, Autumn 2013 1104000030 1104000049 1104000096 1104000108 1004000103 Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” TABLE OF CONTENTS TABLE OF CONTENTS .2 ACKNOWLEDGEMENT .3 I INTRODUCTION II DISCUSSION OF FINDINGS MARKET FORM & EFFICIENCY a United States b Australia c Vietnam III PRACTICES .12 a United States 12 b Australia 13 c Vietnam 14 CONCLUSIONS 16 REFERENCE .17 Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” ACKNOWLEDGEMENT We want to direct our deepest gratitude to Ms Nguyen Thanh Loan for providing us essential theory in Financial System subject this autumn, 2013 We appreciate your enthusiastic guideline and your kindness for spending time answering our questions about our project after class Also, we want to say many thanks to the Faculty of Management and Tourism for giving us a chance to study all related financial issues in such an interesting and important subject However, due to the shortage of time and the lack of information as well as our limited knowledge in finance, problem is unavoidable As a result, we would like to continue receiving your feedback and suggestions so that we could develop our skills and gain knowledge for future projects Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” I INTRODUCTION “Anyone who thinks there is safety in numbers has not looked at the stock market pages” – Irene Peter is only one among many famous quotes of United States’ investors about the stock market It is a matter of fact that the most constant aspect of the financial market is change which obviously experienced by the volatility of market shares price However, different type of markets has its own unique characteristic in the scope and scale of change and those differentials will be discussed though out this report The very first part looks at three different financial markets though out the world: the United States stock market, Australia stock market and Vietnam stock market as three example of financial market It then relies on several researches, tests to illustrates and differentiate those characteristics among each type of markets After that, the paper will also compare three markets in information reacting aspect and give a conclusion about the “informational efficiency” issue Finally, we will give our recommendation toward Vietnam financial market based on our knowledge in Financial System subject Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” II DISCUSSION OF FINDINGS MARKET FORM & EFFICIENCY a United States Regarding the global reputation as one of the most powerful nations, the United States stock market is one out of three markets over the world this assignment will study about its informational efficiency As a matter of fact, it is thought that the U.S market must be strong, or at least semi-strong, form of market efficiency However, it turns out to be efficient weak form according to a number of researches and analysis conducted in recent years (Saramat & Dima, 2011) According to Timisoara Journal of Economics (Saramat & Dima, 2011), an investigation was took place to examine the weak-form of market efficiency in the United States of America, accompanied by the United Kingdom and Japan Particularly, they studied on the DJI indexes, the FTSE 100 and NIKKEI 225 over the period of 15 years (1995-2010) In this research, the authors utilized the Variance Ratio Test on time series, specifically the Hurst exponent of the indexes To affirm whether or not the Hurst exponent is valid, the Detrended Fluctuation Analysis FDA was used and divided into five steps resulting in as follows: Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” As can be seen from the above table, it is impossible to treat the Hurst exponent series fairly as random walks, exponential random walks or containing random walks innovation for none of the considered indexes In conclusion, the Hurst exponent for the prices series is suggested not being described as random walk processes; or in other words, the results reject the Market Efficiency Hypothesis for American markets b Australia Worthington and Higgs (2006) had conducted a research in order to examine the weak-form market efficiency of the Australian stock market They carried out several procedures in their study to make the random walk hypothesis; however, this report will only present one of them, which is the serial dependence test Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” The data employed in this study includes monthly returns from February 1875 to December 2005 and daily returns from January 1958 to 12 April 2006 The descriptive statistics such as sample means, maximums, minimums, standard deviations, and Jacque-Bera statistics and p-values - of those returns can be seen from the following table: Table Descriptive statistics for Austrlian monthly and daily market returns Frequency Monthly Daily Observations 1575 12519 Mean 0.4407 0.0284 Max 21.702 Min Std Jacque- JB Dev Bera value 55.244 3.8636 7.0162 28.7611 0.8260 6.20E+0 8.28E+0 p- 0.0000 0.0000 The calculated Jacque-Bera statistics and corresponding p-values in Table are used to test the null hypotheses that the monthly and daily distribution of market returns is normally distributed All p-values are smaller than the 01 level of significance, which suggest the null hypothesis can be rejected None of these market returns are then well approximated by the normal distribution The serial dependence test contains two approaches First, the serial correlation coefficient test examines the relationship between returns in the current period and those in the previous period If no significant autocorrelation is found then the series are assumed to follow random walk Second, the runs test determines whether successive price changes are independent and unlike the serial correlation test of independence, is non-parametric and does not require returns to be normally distributed Observing the number of “run” – or the sequence of successive price changes with the same sign – in a sequence of price changes tests the null hypothesis of randomness To perform this test, A is assigned to each return that equals or exceeds the mean value and B for the items that are below the mean Let nA and nB be the sample sizes of items A and B respectively The test statistic is U, which is the total number of Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” runs For a large sample, that is where both nA and nB are greater than twenty, the test statistic is approximately normal distributed: The following table illustrates the tests of independence: Table 2: Independence tests for Australian monthly and daily market returns Serial correlation Frequency Coefficient pvalue Runs test Mean Cases< mean Cases >= mean Total Number cases of runs 700 Monthly 0.0410 0.1038 0.4407 766 809 1575 Daily 0.1630 0.0000 0.0284 6355 6164 12519 5086 Runs Zvalue -4.4351 20.9738 Note: The sample period for monthly series is from 28 February 1875 to 30 December 2005 and from January 1958 to 12 April 2006 for the daily series According to the table content, the null hypothesis of no serial correlation for the daily return is rejected at the 01 level but is not rejected for the monthly returns Based on the significance of autocorrelation coefficient, we can conclude that the daily return series is weak-form inefficient Regard to the runs test, the negative z-values for both returns series demonstrate that the actual number of runs falls short of the expected number of runs under the null hypothesis of return independence at the 01 level, which indicate the presence of serial correlation In conclusion, the results for the test of serial correlation are in general agreement that approve of the weak-form inefficiency over the sample period These tests of serial correlation base on the largest samples of available monthly and daily prices from All Ordinaries Price Index (since 1979) - the most internationally recognized indicator of the Australian share market- and its predecessor from the Sydney stock exchange (until 1979) (All Ordinaries Index, 2013) Therefore, the significances and the reliability of pvalue 0.0000 0.0000 Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” the tests are very high Moreover, another research of Australian market in 2010 also demonstrates the same result (Simmons, 2010) In conclusion, we can indicate that Australian market is weak-form inefficient c Vietnam Eugene Fama (1970) is the first researcher to divide the efficiency market hypothesis (EMH) into three forms: weak, semi-strong and strong (Karz, 2011) This research will demonstrate focusing on what is the form of the effectiveness of the Vietnamese money market First of all, we examine whether VN has strong EMH or not In strong form efficient markets, if markets were efficiently implement so that any information (including priority information) does not allow users gain any superior investment benefits That result is very difficult to exist in reality, particularly in Vietnam market since illegal activity such as insider trading can earn a huge profit Moreover, Vietnam's stock market just operates in nearly a decade in the general conditions of the growing economic; there are so much financial difficulties in transparency issues and disclosure of information Therefore in Mobarek (2000), Basdevant and Kvedras (2000) (htt), Cosma (2000) (www) said that for emerging stock markets with new operation, the market is not effective or weak form of EMH Therefore, next part of this research will only test the rest two forms of the Vietnamese money market which are semi-strong form or weak form Check the actual state with the semi-strong form of EMH On the stock market up to this point, it has not yet published studies testing on the semistrong form of EMH because file information for testing is very difficult to get (the information is not be published enough or reliable published information is not given on time regulation ) Check the actual state with the weak form of EMH Testing weak form of EMH (WFEMH) is to check whether using the past string of stock price or yield model can predict the stock price or yield of shares in future or not This appraisal is conducted by measuring the statistical dependency between price changes If there is no subordination (it means that price changes are random), the market is WFEMH and vice versa Thus, all tests of the market efficiency is originated by testing random string that follows correctly research of Ko and Lee (1991) Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” To drawn the methodology for WFEHM Vietnam, this study conducted a synthesis of case studies by foreign authors in the emerging stock markets which is similar with Vietnam and other research of their own Vietnamese authors in the Vietnamese stock market The author’s name & year research Dickinson & Muragu (1994) Stock Market Data Methodology - Chain price of 30 Egypt weekly and monthly shares from 1979-1985 Hwey-chyi Lee & Sheng-shyr Taiwan Cheng (2005) Autocorrelation test and Run test shares with 64 types industry from 1999 to regression model Inefficient 2004 with 71 types exchange Le Dat Chi HCMC stock (2006) exchange Ho Viet Tien HCMC stock (2006) exchange exchange some weekly shares in the Symmetrical (2004) Loc (2008) with Efficiency HCMC stock - VN index daily from Parameter Dong Hanoi stock Efficiency - Chain price of 135 Thai Long Truong Conclusion 2001-2003 - 10 method- ARIMA stock’s (bluechip) in yields Autocorrelation Efficiency Efficiency the test and trading with market from 2005-2006 rules only few stocks - Yield of securities in ARIMA, non- the test, Inefficiency market from parametric opening period to 2005 - HaSTC index, GHA stock and VNR stock from 7/2006 to 3/2007 Run test Autocorrelation test and Run test Inefficiency This summary table provides a clearly observation to help us illustrate the methods that the authors used Most of the authors conducted the Autocorrelation Test; also others used Run Test, ARIMA and GARCH These methods are all associated with the random string theory It also was seen across the board the way of using data patterns of the authors: there are some researchers using yield model of individual stocks, while others used a market index At the same time, the figures can also be observed daily, or even in monthly 10 Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” Vietnam's stock market, if be divided into terms of securities market segments, from the opening period of HOSE in to the time of operating Hanoi stock exchange center, EMH Vietnam is inefficient weak form (according to symmetrical model) Investors behavior responding with the information in that time is quite simple, no analyzes with differences and filter When HOSE has working together HASTC until now, it still remains as inefficient weak form EMH, that is, investors can predict the future based on the past price, but stock prices follow the model of symmetrical - which means that the variation of price trends in the past can deduce completely symmetrically for the direction of the future In brief, in both analytical methods of non-parametric and parameters, even by studying all metrics from multi-dimensional in market segments, the research results always show that the Vietnamese stock market is inefficient weak form of EMH It is entirely appropriate for the growing conditions of Vietnam and also be consistent with the results of inspection of some of the developing markets which are similar with Vietnam stock market in the region PRACTICES Part 1, and state information about main markets that we study in this report In order to give you a more specific view about the efficiency of those markets, we will look at some specific examples of each market here in part However, due to the shortage of time as well as the limitation of our knowledge, we could consider only several criteria of financial market and mostly focus on the informational efficiency characteristic a United States Have you ever wonder about how fast the financial market will react to an unexpected event? It is a common knowledge that any unexpected events will absolutely have an effect to the price of stocks in the markets; however, each type of financial market will have a completely different lagging time in reacting to that event Let’s take the United States, which is a strong financial market, as a typical example On September 8,2008, which is five years ago, the story of United Airlines’ parent company’s bankruptcy in 2002, by accident, reappeared on the Internet and was mistakenly be understood as a completely new bankruptcy that the company had to cope with Can you 11 Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” imagine how that “news” would affect to the price of United Airlines’ stocks? According to the United Stocks market figure, the company’s stock price drop by nearly 76 percent in just a few minutes, before NASDAQ halted trading The price then rebounded after the news was announced to be wrong but it took days for the investors to forget about the false news as the price level reach up to the before-false-news point (graph) (http://dmarron.com/2011/10/05/how-fast-does-the-stock-market-forget-false-news-aboutseven-days/) In August 8,2011 the Dow lost 634.76 points (accounted for 5.6%) after S&P announced that the rating agency was downgrading from perfect AAA credit rating to AA+ The United States stock market watched $2.3 trillion in total market value disappear in only six hours (http://abcnews.go.com/Politics/stock-market-history-10-worst-days/story?id=14259116#5) b Australia This section will look at particularly how Australia financial market responds to news, which is to demonstrate its informational efficiency On December 5th 2013, the market witnessed the fall inthe AUD/USD exchange rate (http://www.tradingroom.com.au/apps/view_article.ac?articleId=4981309) On that morning, an ADP employment report announced that 215,000 jobs have been added in the private sector in the US, which exceeded the expectation of only 170,000 This news made the AUD 12 Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” depreciate relatively to the USD, decreasing from 90.62 cents on Wednesday to a new 3month low of 90 cents on Thursday Moreover, the currency price also fell in other terms like JPY or EUR (from JPY92.86 to 92.24 and from 66.69 Euro cents to 66.41 respectively) Furthermore, this news affected the bond market negatively as well (http://www.tradingroom.com.au/apps/view_article.ac?articleId=4981444) On Thursday, the December 10-year bond futures contract was trading at 95.665 (implying a yield of 4.335 per cent), down from 95.755 (4.245 per cent) on Wednesday The December three-year bond futures contract was at 96.860 (3.140 per cent), down from 96.890 (3.110 per cent) The news raised hopes for a powerful result once the official employment figures, such as non-farm payrolls, are announced on Friday While the US was reported to increase its employment, there is potential job cuts projection in Australia This expectation was drawn from the dramatic loss of the national airlines Qantas (http://www.tradingroom.com.au/apps/view_article.ac?articleId=4981588) Qantas reported half-year pre-tax loss of $250 million to $300 million, and said it will axe 1,000 jobs As a matter of fact, Australia share market decreased heavily Responding to such news, its shares closed 13.5 cents or 11.2 per cent, lower at $1.07, with 80 million shares changing hands At the end of the day, the ASX200 index has fallen four out of the last five sessions Many top stocks fell in their prices, including Woolworths, which dropped 59 cents, or 1.8 percent, to $32.82 and Wesfarmers, which gave up 54 cents to close at $41.76 Following the crisis, major banks posted heavy losses, with Westpac the biggest loser dropping 86 cents, or 2.7 per cent, to $31.49, Commonwealth sagging $1.30 to $75.50, ANZ retreating 57 cents to $31.19 and National Australia Bank dumped 72 cents to $33.66 Some key facts for the days are as followed:  At the close on Thursday, the benchmark S&P/ASX200 index was 75.8 points, or 1.44 per cent, lower at 5,198 points  The broader All Ordinaries index was down 70.6 points, or 1.34 per cent, at 5,196.9  points The December share price index futures contract was 66 points lower at 5,211 points,  with 32,296 contracts traded The price of gold in Sydney was $US1246.80 per fine ounce, up $US24.67 on Wednesday's closing price of $US1222.13  National turnover was 2.0 billion securities worth $5.3 billion The Australian market overall was weaker following overnight falls on overseas markets 13 Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” c Vietnam Different types of financial markets experience different length of lagging time The United States is one of many examples of semi-strong markets whereas Vietnam financial market totally lies on the line of weak ones Taking the similar example in Vietnam, there are some obvious differential about the two markets In Vietnam, in 2010, the VSP seemed to fluctuate strangely At first, from 10/2009 to 3/2010, the market price of VSP (belong to Vinashin) stock decreased from 47,000 VND to 25,000 VND (reduce approximately 50%) as the loss of Vinashin company reached up to 230 billion VND In the first quarter of the year 2010, VSP continued reporting the loss of more than 360 billion VND but the price of VSP reduced only by 800 VND which then down to 24,200 VND At this point, the stock market price moved the same as the United State market but at the rate much slower (about or months) (http://tinnhanhchungkhoan.vn/charts/noidung.php?nid=32202) From this point onward, the strange became obvious with the representative of a “hidden arm” A hidden investor suddenly appeared and bought more than million shares of VSP The question about why he or she decided to buy all listed shares of VSP when the worst new were published made up a rumor in Vietnam financial market The answer to that question are still unrevealed but the fact that VSP shares price rocketed to 64,000 VND in only month later did play an important evidence in “hidden arm” theory in Vietnam financial market Table of comparison US financial market Australia market financial Vietnam market Type of market Semi-strong Semi-strong/weak weak Number of shares Largest In the middle Smallest financial Length of lagging Several minutes (~2 Couple hours time minutes) Few days (~7 days/ up to months) Time for recovering Several weeks Several months Equally Unclear but mostly equally Degree of published Strong information In between Weak Ability of being Weak controlled by one individual In between Strong Degree of distribution days share Equally 14 Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” III CONCLUSIONS The three financial markets, in the order from the United States, to Australia and Vietnam, have the ascending strengths in their forms as well as their informational efficiency After the findings, the most obvious and considerable conclusion is the link between the strength of financial markets and their ability to control their market share prices The strongest form of the market belongs to the United States Stock prices in the United are determined by their transaction of the whole market In other words, the share prices of the United States are mostly effective in reflecting the market price and the performance of U.S companies That ability decreases from United States to Australia and Vietnam The second conclusion is about the way a single investor could control the whole market price When the markets are strong, it is harder for an investor to control the market price by buying or selling a large number of stocks at once This matter can be understood by changing in the scale of the financial market The number of shares and the capital raised in the United States financial market are much higher than that of the weaker form (Vietnam) Besides, shares of one company are normally distributed with the total value covered up to million or even trillion dollars Those factors create a more balance position in the market leads to the equality in U.S companies’ power toward the market By contrast, when the market is weak, the total value of shares and the number of shares are small, one single investor could control the market price much easier (the case of Vietnam) 15 Faculty of Management & Tourism – Tut 3BA11 Financial System Project – “Market Form & Efficiency” REFERENCE (n.d.) Retrieved from http://www.eestipank.ee/en/publication/workingpapers/2002/virmantas-kvedaras-olivier-basdevant-testing-efficiency-emerging-markets-casebaltic-states (n.d.) Retrieved from www.e-m-h.org/Cozm02.ppt (n.d.) Retrieved from http://www.ccsenet.org/journal/index.php/ijbm/article/download/286/258 (n.d.) Retrieved from http://www.docstoc.com/docs/71676708/TCDN_Thi-truong-hieu-qua (n.d.) Retrieved from http://doc.edu.vn/tai-lieu/luan-an-ung-dung-ly-thuyet-thi-truong-hieuqua-trong-phan-tich-thi-truong-chung-khoan-viet-nam-41834/ All Ordinaries Index (2013) Retrieved 11 2013, from All Ords - Share Prices & Chart: http://www.asxallordinaries.com/ Karz, G (2011, 18) The Efficient Market Hypothesis and the Random Walk Theory Retrieved 11 2013, from Investor Home: http://www.investorhome.com/emh.htm Saramat, O., & Dima, B (2011) Testing the Weak-Form Informational Efficiency of United Kingdom, United States of America and Japan's Capital Market Timisoara Journal of Economics , 111-122 Simmons, P (2010) Testing the Efficient Market Hypothesis in the Australian Share Market using a Differential Evolutionary Algorithm The 39th Australian Conference of Economists Sidney Truong, D (2008) “Kiểm định giả thuyết thị trường hiệu mức độ yếu cho “Kiểm định giả thuyết thị trường hiệu mức độ yếu cho 16 ... theory in Vietnam financial market Table of comparison US financial market Australia market financial Vietnam market Type of market Semi-strong Semi-strong/weak weak Number of shares Largest In the... any information (including priority information) does not allow users gain any superior investment benefits That result is very difficult to exist in reality, particularly in Vietnam market since... of lagging time The United States is one of many examples of semi-strong markets whereas Vietnam financial market totally lies on the line of weak ones Taking the similar example in Vietnam, there