(Luận văn) the impact of macroeconomic factors on conditional stock market volatility in vietnam

1 MINISTRY OF EDUCATION AND TRAINING t to UNIVERSITY OF ECONOMICS HOCHIMINH CITY ng hi - oOo - ep w n lo ad ju y th yi pl NGUYỄN THÚY VÂN al n ua THE IMPACT OF MACROECONOMIC FACTORS ON va n CONDITIONAL STOCK MARKET VOLATILITY fu ll IN VIETNAM oi m at nh z z ht vb MAJOR: BANKING AND FINANCE k jm MAJOR CODE: 60.31.12 n a Lu INSTRUCTOR: Doctor TRƯƠNG QUANG THÔNG om l.c gm MASTER THESIS n va y te re Ho Chi Minh City – 2011 ACKNOWLEDGEMENT t to ng hi Firstly, I would like to express my sincerest gratitude to my supervisor, Dr ep Truong Quang Thong for his valuable guidance and helpful comments during the course of my study w n I also would like to thank all of my lecturers at Faculty of Banking and lo ad Finance, University of Economics Hochiminh City for their English program, y th knowledge and teaching during my master course at school ju yi I would like to specially express my thanks to my classmates, my friends for pl their support and encouragement al n va life n ua Special thanks should go to my family for their love and support during my ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re t to ng ABSTRACT hi ep The study looks at the relationship between macroeconomic factors and and stock market, and determined whether inflation, movements in exchange rate, w n interst rate have an effect on stock market return volatility in Vietnam The lo ad Generalised Autoregressive Conditional Heteroskedascity (GARCH) models are ju y th used in establishing the relationship between these variables and stock market volatility The results confirms presence of GARCH (1,1) effect on stock return time yi pl series of Vietnam stock market It is also found that there is strong and positive al ua relationship between inflation and stock market return volatility It means that an n increase in inflation leads to an increase in stock market return volatility in the long va n run However, there is no enough proof to conclude that change in interest rate and fu ll exchange rate can influence market return volatility oi m nh at Keywords: volatility, leverage, interest rate, inflation, exchange rate, z returns, Hochiminh Stock Exchange z ht vb k jm om l.c gm n a Lu n va y te re i t to Table of contents  ng hi ep CHAPTER Introduction 1.1 Introduction w n 1.2 Research problem lo ad 1.3 Research objectives .3 y th 1.4 Research methodology and scope .3 ju yi 1.5 Structure Of The Study pl ua al CHAPTER Literature review n 2.1 Introduction n va ll fu 2.2 ARCH and GARCH model Conditional Heteroskedasticity at (GARCH) Autoregressive nh 2.2.2 Generalized oi m 2.2.1 Autoregressive Conditional Heteroskedasticity (ARCH) z z ht vb 2.3 The impact of macroeconomic variables on stock market volatility k jm 2.3.1 Inflation .10 gm 2.3.2 Interest rate 11 l.c 2.3.3 Exchange rate .13 om 2.4 Application of Garch model in Vietnam 14 a Lu 2.5 Conclusion 15 n n va CHAPTER Research Methodology 16 3.2.1 Research data 16 y 3.2 Research data and construction of variables: 16 te re 3.1 Introduction .16 ii 3.2.2 Construction of variables for the models: 23 t to 3.3 DF unit root test: 25 ng hi 3.4 Hypotheses and empirical models .26 ep 3.4.1 Model 1: The standard GARCH (1,1) model .26 w 3.4.2 Applying GARCH (1,1) models to find out the impact of n lo ad macroeconomic variables on stock return volatility 27 ju y th 3.5 Conclusion 28 yi CHAPTER Empirical Results of the Research 29 pl ua al 4.1 Introduction .29 n 4.2 Descriptive statistics 29 va n 4.3 DF unit root test 30 fu ll 4.4 Correlation Matrix of the variables 30 m oi 4.5 Emprical result of model 31 nh at 4.5.1 Model 1: Standard GARCH (1,1) .31 z z 4.5.2 Model .32 vb ht 4.5.3 Model .34 jm k 4.5.4 Model .35 gm l.c 4.5.5 Model .37 om CHAPTER Conclusions, Limitations and recommendations .39 n a Lu 5.1 Introduction 39 y APPENDIX 45 te re REFERENCES .42 n 5.3 Limitations and recommendations: 40 va 5.2 Conclusions and Implications 39 iii t to ng hi ep Descriptive Statistics of variables .45 Monthly CPI from 2000 – 2010 (Source: GSO) .47 Unit root test .48 Data 50 w n lo ad Figures y th  ju yi Figure 3.1 The performance of VN-Index from 07/2000 – 12/2010 .17 pl ua al Figure 3.2 Inflation in Vietnam and selected countries 2000 - 2009 .19 n Figure 3.3 Vietnam‟s nominal exchange rate (VND/USD) and inflation rate n va 1992-2010 20 ll fu Tables oi m  nh Table 3.1 Vietnam exchange rate arrangement 2000 - 2010 22 at z Table 4.1 Descriptive statistics of variables (07/2000 – 12/2010) 29 z ht vb Table 4.2 ADF UNIT ROOT TEST 30 jm Table 4.3 Correlation Matrix of the variables 31 k Table 4.4 Result of model 31 gm Table 4.5 Result of model 33 om l.c Table 4.6 Result of model 34 Table 4.7 Result of model 36 a Lu Table 4.8 Result of model 37 n n va y te re iv Glossary t to CPI: consumer price index ng hi SBV: State Bank of Vietnam ep GARCH: Generalized AutoRegressive Conditional Heteroskedasticity w n ARCH: Autoregressive Conditional Hetroskedasticity lo ad GDP: Gross Domestic Product y th ju HOSE: Hochiminh Stock Exchange yi pl n ua al n va ll fu oi m at nh z z ht vb k jm om l.c gm n a Lu n va y te re t to ng hi ep CHAPTER Introduction w n lo 1.1 Introduction ad Stock return volatility refers to the variation in stock price changes during a y th ju period of time Normally investors and agents perceive this variation as a measure of yi risk The policy makers use estimate of volatility as a tool to measure the vulnerability pl ua al of the stock market Since understanding the nature of stock market volatility gives important implications for policy makers and investors, movements in stock prices n n va volatility have been the central variable of many researches There have been numerous oi m stock market volatility ll fu of studies trying to answer an interesting question: what are the factors that derive at nh Researchers have analyzed the relative importance of economy-wide factors, industry-specific factors, and firm-specific factors stock volatility One of the earliest z z studies was of Officer (1973) which related changes in stock market volatility to vb jm ht changes in real economic variables He noted that variability in stock prices was unusually high during the period of great depression i e 1929-1939 compared with k gm pre-and post-depression periods Schwert (1989) was a classic study which intended to l.c verify Officer‟s (1973) findings and explored the relationship between stock prices om volatility and macroeconomic variables This issue has been studied by numerous an Lu researches and their findings are not the same Many papers of Engle and Rangel (2005), Campbell (1987) and Shanken (1990)…confirmed that macroeconomic factors va n had significant effect on stock market volatility Contrary to this, Davis and Kutan ey power for explaining variability of stock market prices and returns volatility Inconsistent t re (2003), Schwert (1989) evidenced that macroeconomic variables had weak predictive th t to ng hi results depend on different characteristics of every countries as well as different time ep periods w Since ARCH model was proposed by Engle (1982) and generalized by n lo Bollerslev (1986) and Taylor (1986), the models have been proved to be sufficient in ad capturing properties of time varying stock return volatility Literatures have found y th evidence in support the capability of GARCH models in volatility estimation as well as ju yi volatility forecast pl ua al Vietnam stock market was newly established in 2000 in Ho Chi Minh City on n 28 July 2000 (Hochiminh Stock Exchange – HOSE) In the first trading session there n va were only two stocks with a total market capitalization of 270 billion VND Although ll fu the market has significantly grown over ten years of operation (until at the end of oi m 2010), it is still rather small and incomplete in comparison to other stock markets in the nh Asian region Moreover, interest rate, inflation, exchange rate and stock market are hot at subjects attracting attention of the government, investors and corporations in recent z z years Relationship among these macroeconomic variables as well as their effect on vb jm ht stock market has been discussed every day In fact, in Vietnam, inflation, interest rate and exchange rate impact on stock market? Can we measure this impact? k l.c gm 1.2 Research problem Research and practice have proved the important role of macroeconomic om variables on the economy Stock market volatility is known as one of the most an Lu important phenomena that determine the amount of risk faced by investors The impact va of macroeconomic factors on stock market including market volatility is a major n question to be posed and tested in many countries around the world However, as far as th market is not really operating under the law of supply and demand but it is influenced ey issue In addition, unlike the stock market in the developed countries, Vietnam's stock t re the author is concerned, in Vietnam there were not many researches exploring this t to ng hi by herb behavior and "crowd effect" Therefore, no one can confidently confirm that ep changes in macroeconomic factors impact to the entire stock market Moreover, inflation, exchange rate, interest rate and stock market are hot topics in recent years w n lo As the importance of volatility as a proxy of risk, the advantages of GARCH ad family and Vietnam stock market‟s particular situation mentioned above, the paper y th chooses to study the impact of inflation, exchange rate and interest rate to stock market ju yi volatility by applying GARCH models My study will try to answer the following pl questions: What macroeconomic determinants of stock market volatility in Vietnam al n ua are? And how they specifically affect the stock market? va n 1.3 Research objectives ll fu The main purpose of this study is to identify factors that impact stock market oi m conditional volatility using the data from Hochiminh Stock Exchange nh The present study contributes to the literature in three ways at z Firstly, the present study will shed some light on the depth of the stock market z ht vb activities especially in emerging market in addition to identifying and relating the jm changes in economic factors to the changes in stock market movements It is necessary k to have more and more researches about Vietnam stock market so that we can l.c gm understand and develop our immature stock market Secondly, the findings of this investigation should enable the investors to know om about stock market volatility as a measure of risk and make their decision an Lu Finally, the study will help the policy makers in seeing the effect of their policy n va to stock market and choosing in which way they should adjust their policy th research by using data of Hochiminh Stock Exchange Index (VNIndex), inflation, ey To achieve the above mentioned objectives, the author employs quantitative t re 1.4 Research methodology and scope