(Tiểu luận) the impact of monetary policy on vietnamese stock market

Objectives of the study: This study aims to analyze and evaluate the impact of monetary policy two tools: money supply, interest rate changes on Vietnam''''s stock market in the period of t

FOREIGN TRADE UNIVERSITY HCMC CAMPUS

FACULTY OF INTERNATIONAL ECONOMICS

-  - 

MIDTERM PROJECT

THE IMPACT OF MONETARY POLICY ON VIETNAMESE STOCK

MARKET Module : Econometrics

Teacher : Ms Le Hang My Hanh

Ho Chi Minh, April 2022

No Names Student ID % Contribution

LIST OF ABBREVIATIONS

LIST OF TABLES

LIST OF FIGURES

ABSTRACT 1

CHAPTER 1: INTRODUCTION 2

1.1 Introduction 2

1.2 Objectives of the study 3

1.3 Subjects and scope of the study 3

1.3.1 Research subjects 3

1.3.2 Research scope 3

1.4 Research Methods 3

1.5 The layout of the topic 3

CHAPTER 2: THEORETICAL FOUNDATIONS AND EXPERIMENTAL STUDIES 4

2.1 Theoretical Foundations 4

2.1.1 Monetary Policy 4

2.1.2 Stock price index 4

2.1.3 Monetary instruments used by the state to change stock price indexes 5

2.2 Experimental studies 8

CHAPTER 3: ECONOMETRIC METHODOLOGY 11

3.1 Specifications of the variables 11

3.2 Specification of the econometric model 13

3.3 Data collection and processing methods 14

3.3.1 Data collection methods 14

3.3.2 Data processing methods 14

CHAPTER 4: TEST RESULTS AND DISCUSSION 16

4.1 Test results 16

4.1.1 Testing the overall significance level of model: 16

4.1.2 Testing the significance level of each independent variable: 17

4.1.3 Testing multicollinearity 17

4.1.6 Estimating coefficient of variables 20

4.2 Discussions 21

CHAPTER 5: CONCLUSION AND POLICY RECOMMENDATIONS 24

5.1 Conclusion 24

5.2 Policy recommendations 25

5.3 Limitations of the research 25

REFERENCES 26

APPENDIX 32

Abbreviation Explanation

Table Page Table 3.1 Specifications of the variables & testing hypotheses 11

Table 3.2 Specifications of the variables 12

Table 4.1: Results from regressing model (Appendix 1) 14 Table 4.2: The correlation coefficient among explanatory variables using

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ABSTRACT

Monetary policy is among the most powerful financial instruments of the Government regarding exerting impact on the economy Stock market, on the other hand, proves very volatile and susceptible to market shocks Our research, therefore, aims to examine the impact of monetary policies and market shocks on the stock market, with the main subject matters being VNIndex as the dependent variable and money supply, customer price index (CPI) representing inflation, exchange rate, and interest rate as independent variables The scope of research is from 2016 to 2021 and the samples are taken in Vietnam and the model in use is the Ordinary Least Square regression model

partake in the earnings of publicly listed companies

However, there are studies that show the stock market is affected by monetary policy Monetary policy is an economic policy that governs the quantity and pace of expansion of an economy's money supply It is an effective instrument for controlling macroeconomic factors such as inflation and unemployment These policies are achieved through many mechanisms, including as interest rate adjustments, the purchase or sale of government assets, and changes in the quantity of cash circulating

in the economy These policies are developed by the central bank or a comparable regulatory entity

The relationship between monetary policy and the stock market has attracted more and more attention from investors, researchers and policy-making agencies Understanding the impact of monetary policy on the stock market is critical for policymakers to make right decisions and for investors to determine whether or not

to invest

In this research, we will largely focus on the effect of monetary policy on the stock market in the Vietnamese market from 2016 to 2021 in order to acquire a more comprehensive picture of our sector The research will investigate the impact of monetary policy on the stock market using two variables: interest rates and money supply There are two more external issues to consider: inflation and exchange rate

1.2 Objectives of the study:

This study aims to analyze and evaluate the impact of monetary policy (two tools: money supply, interest rate) changes on Vietnam's stock market in the period

of time from 2016 to 2021 The objective of the study will be concretized into the following research question: "How will the change in monetary policy in Vietnam affect the Vietnamese stock market?"

1.3 Subjects and scope of the study:

1.5 The layout of the topic

The structure of the thesis consists of five chapters:

Chapter 1: Introduction to the topic

Chapter 2: Theoretical foundations and experimental studies

Chapter 3: Research methodology

Chapter 4: Test results and discussions

Chapter 5: Conclusion and policy recommendations

CHAPTER 2: THEORETICAL FOUNDATIONS AND EXPERIMENTAL

2.1.2 Stock price index:

Stock price index is a stock quote index that reflects the development trend of the stock market, shows the changing trend of stock prices and the trading situation

in the market Simply, a stock price index is the average price of a stock at a given date relative to the base date (Nguyen Minh Kieu and Bui Kim Yen, 2009) In Vietnam, there are many different stock market indexes such as VN-Index, VN30, HNX-Index, HNX30, UPCOM, VNXAllShare In which, VN-Index is considered the most reliable because it is the index representing all stocks listed and traded on the

Ho Chi Minh City Stock Exchange (HOSE) - the largest stock exchange in Vietnam VN-Index is calculated according to the formula:

P0i: Market price on the base date of stock i, taking the closing price of stock i on the first trading day

Q0i: Number of listings on the base date of stock i

In the case of an expansionary monetary policy, the economy's interest rate falls, which lowers the discount rate on assets, raising the projected price and increasing revenue Higher interest rates, in the case of tight monetary policy, raise the discount rate in the valuation model, making fixed income assets more appealing, reducing stock liquidity, and lowering the desire to borrow Borrowing to invest in securities and, as a result, hurting company profitability, as well as the effect of falling stock prices Rahman, Sidek, and Tafri (2009), as well as Rozeff (1974), found that monetary policy has a considerable impact on stock return growth Maysami and Koh (2000) add that the money supply and the SGX index (Singapore Stock Exchange Index) have a positive relationship

Inflation

Inflation is the persistent increase in the general price level of goods and services over time and the loss of value of a currency When the general price level rises, a unit of currency buys fewer goods and services than in the past, so inflation reflects a decrease in purchasing power per unit of currency And the Consumer Price Index (CPI) is used as the basis for calculating inflation

Most of the experimental research results in Vietnam show that inflation and stock price index have a negative relationship Indeed, looking at the VN-Index chart

in Vietnam from 2002 to now, it can be seen that in 2008 the CPI reached its highest level, the stock market peaked and fell into a downward shock cycle Other years with high CPI also sent the stock market down

This can be explained by two reasons Firstly, the higher the inflation, the faster the value of the currency will go down, making people tend to hold assets that are less depreciated like gold, real estate, instead of investing in other channels with high liquidity such as stocks, bonds or bank deposits At that time, the demand in the stock market decreased while the supply remained the same, causing the stock market price to decrease In addition, inflation also indirectly affects the stock market through production and business results of enterprises Specifically, inflation causes input costs of enterprises to increase, leading to higher prices of final products sold than before to ensure that enterprises still have guaranteed revenue for production activities However, if the price of a good is too high, consumers will switch to other

cheaper substitutes This leads to a decrease in both sales volume and expected profit

of the business, making the business less attractive in the eyes of investors Ultimately, this would lead to a market failure In general, high inflation is often considered a negative signal for the stock market because it causes borrowing costs, input costs (raw materials, labor) to increase, as well as reduce people's living

standards

Interest Rate

Research by Bui Kim Yen and Nguyen Thai Son (2014) when using the VECM model, Dang Thi Quynh Anh (2018) when applying the VAR model and other studies within Vietnam have shown that interest rates have negatively affected the stock price index Specifically, when interest rates increase, individual customers will be affected through increased interest rates on credit cards and other short-term loans At the same time, individuals may also limit their debt levels, so consumers will now have less money to spend As a consequence, this will entail a decline in consumer consumption of businesses' goods In addition, businesses themselves also need to borrow money from commercial banks to maintain operations and expand production Once loans from banks become more expensive, businesses will be reluctant to borrow money because they have to pay a higher interest rate up front for the corresponding loans For a business in a growth period, this can have a serious impact, causing the business to narrow its scope of operations and, as a result, reduce profits Once a business is seen by the market as cutting growth investment costs or

is making less profit because of rising debt costs or declining sales due to consumers, the future money is expected to decrease and of course, the share price of the business will go down If the number of businesses on the stock market that has this decline is large enough, then considering the entire market, the stock market index will decrease

Exchange rate

According to Le Minh Truong (2021), the exchange rate is the price of one country's currency expressed in terms of another country's currency In other words,

the exchange rate is the amount of another country's currency that one unit of one country's currency can buy at a given time

In Vietnam, according to research by Dinh and Nguyen (2008) or Bui Kim Yen and Nguyen Thai Son (2014), there is a positive relationship between the stock price index and the exchange rate When the exchange rate (VND/USD) increases, the VND depreciates, making the prices of Vietnamese domestic goods relatively cheaper when exported abroad International trade activities are increasing and domestic enterprises also become more competitive in the international market As a result, the stock prices of these companies increased However, not all studies suggest that the exchange rate has a positive effect on the stock price index Nguyen Thi Nhu Quynh and Vo Thi Huong Linh (2019) studying data for the period 2000-2018 in Vietnam using the VECM model concluded that VN-Index and exchange rate have

an inverse relationship in the short term Or Zhao H's (2010) study on the Chinese stock market according to VAR and conditional variance with multivariable generalized generalized regression (GARCH) also shows that there is no effect between exchange rate and stock prices Similarly, Lou T, Luo W (2018) studied the markets of G7 countries according to Granger causality test and also concluded that there is no significant relationship between stock price index and exchange rate in G7

Through the above empirical studies, it can be seen that the influence of exchange rate on stock price volatility and stock market is different depending on each market and each situation

2.2 Experimental studies:

Almost all empirical research results conducted in the domestic market have concluded that in general, monetary policy affects the stock market as well as the VN-Index in particular However, due to the difference in time limit and scope of research, some conclusions are not the same in terms of conclusion of time and impact of each factor affecting the stock market Older studies have shown that monetary policy has

an impact on the stock market (in line with the research of world countries), but recent articles have concluded that monetary policy has not completely affected the stock

market in Vietnam For example, in the research paper “Tác động của chính sách tiền

tệ đến thị trường tài chính Việt Nam trước và sau giai đoạn Covid 19” by Nguyen Huynh Doan Trang (2021) with a research scope from 2016 to 2021, the regression results show that monetary policy has no significant impact on financial markets before and during the COVID-19 period The study of Vo Xuan Vinh, Nguyen Huu Xuan and Le Thi Phuong Thao (2018) concludes that the monetary policy transmission channel only has a temporary effect on the stock market, but is not really effective in controlling the stock market in the long term This is quite true with the basic theories of economics on monetary policy because according to Mundell-Fleming, for a small, open economy with inflexible exchange rate policy like Vietnam, monetary policy is easily disabled and has little effect On the contrary, fiscal policy is more suitable in the above conditions Meanwhile, the research of Trung Thanh Nguyen, Thi Linh Do, Van Duy Nguyen (2016) with the topic “Impacts

-of Monetary Policy and Information Shock on Stock Market: Case Study in Vietnam” collecting the data through the period 2006-2015, shows that monetary policies (interest rate, exchange rate and required reserve ratio) have long-term impacts on the stock price Regarding the level of impact of the variables, many articles suppose that the money supply has a great influence on the change of the stock market while some articles argue that the stock market is most affected by interest rates Other articles also show that the stock market reacts strongly to inflation, such as a study by Dang Thi Quynh Anh (2018)

Although there are still contradictions in some conclusions, the empirical studies all share one thing in common, that is, using four monetary policy variables including money supply, inflation, interest rate and exchange rate Besides, some studies also not only study the relationship between monetary policy variables and stock market but also consider the impact of other domestic and foreign factors such

as industrial index, refinancing interest rate, US Federal Reserve interest rate such as Nguyen Ngoc Doan Trang's study (2019) “Tác động của chính sách tiền tệ lên giá cổ phiếu trên thị trường chứng khoán Việt Nam”; GDP by month as in the article “Chính sách tiền tệ và tỷ suất sinh lợi thị trường chứng khoán: Từ phân tích biến động GARCH” by Pham Anh Thu, Nguyen Anh Duong (2020), “The effects of monetary

policy on stock market bubbles: Some evidence” by Jordi Gali, Luca Lambetti (2014); or gold and oil prices in the study “Tác động của một số yếu tố kinh tế vĩ mô đến chỉ số giá chứng khoán tại Việt Nam” by Nguyen Thi Nhu Quynh, Vo Thi Huong Linh (2019), and many so on in order to comprehensively analyze the relationship between monetary policy and the stock market However, not all studies include these variables and if they do, the conclusions also indicate that the degree of influence of these variables is considered to be insignificant or even non-existent in the long run

In addition, after having read the study “The Impacts of Monetary Policy Channels

on Stock Market - The Case of Vietnam” written by Vo Xuan Vinh, Nguyen Huu Xuan and Le Thi Phuong Thao in 2018, a conclusion can be reached that using too many variables for a model is not that necessary because this means the data collected needs to be large enough to be able to give good results in the long run In fact, it is quite difficult to guarantee a full collection of the data of previous years, and the process of processing these data is also not easy

Methods and research models used in experimental studies are quite diverse such as OLS regression model, Autoregressive Distributed Lag (ARDL: Autoregressive Distributed Lag) method, quantitative and qualitative methods, etc but overall, the three most widely used models are vector autoregression model (VAR), structural vector autoregression model (SVAR) and vector error correction model (VECM) Although the application of these three models will help make a better assessment of the change in the stock market when facing the unexpected shocks of monetary policy tools as well as the influence of monetary variables’ impacts on the stock market in the short and long term, these models are beyond the beyond the knowledge covered in our syllabus and the formulas are also complicated

to figure out and to understand deeply

For the reasons mentioned above, our team decided to use only four variables

in our study, including money supply, inflation, interest rates and exchange rates from

2016 - 2021 to ensure that the sample size is totally complete, relevant and uninterrupted to give out the best results possible Simultaneously, the model used in our research will be the familiar one that has been covered in our Econometrics course, which is the regression model by means of ordinary least squares (OLS)

CHAPTER 3: ECONOMETRIC METHODOLOGY

3.1 Specifications of the variables:

Table 3.1 Specifications of the variables & testing hypotheses

Types of

Variables

correlation with dependent variable

Dependent

variable

lnSTO % Natural logarithm of stock

price index Independent

lnCPI % Natural logarithm of

Consumer Price Index (representing Inflation)

+/-

Table 3.2 Specifications of the variables

lnSTO 72 6.807801 0.2465666 6.301244 7.312073 lnM2 72 16.03755 0.2263237 15.6251 16.41092 lnEXC 72 10.03055 0.0213223 9.992093 10.05432 lnCPI 72 4.61012 0.0071908 4.58965 4.63074

IR 72 2.031389 1.490916 0.1 5.01

As can be seen from the variable specifications, it can be deduced that there was

no serious change in the stock market from 2016 to 2021, as the stock price indicator VNIndex did not fluctuate too significantly, with the minimum value of 6.301244 and maximum value of 7.312073 The same pattern can be observed in other variables, including money supply, exchange rate, CPI, except for the case of interest rate with

a big gap between 0.1% and 5.01% The trough of interest rate was 0.1% in October

2020, which can be explained by the Government’s decision to lower the interest rate

by a large gap in response to many companies and individuals’ financial difficulties during the COVID-19 pandemic (Thuy Ha, 2021)

Figure 3.1 Suggested research model

3.2 Specification of the econometric model:

Based on theoretical and empirical findings of the previous studies, the authors decided to use the multiple regression model (OLS) to evaluate the effects of monetary policy on the stock market The econometric model used is formulated as follows:

STO = f (lnM2, lnEXC, lnCPI, IR) Or:

log(STO) = β0 + β1×log(M2) + β2×log(EXC) + β3×log(CPI) + β4×IR + ui

Inflation (CPI)

Interest Rate (IR)

Money (M2)

Exchange

Rate (EXC)

M2: Vietnamese money supply

EXC: Vietnamese exchange rate (VND/ USD)

CPI: Vietnamese inflation

IR: Vietnamese interest rate

3.3 Data collection and processing methods:

3.3.1 Data collection methods:

The data used in our study was data from Vietnam and collected monthly over the period from 2016 to 2021 Specifically:

Dependent variable:

Vietnamese stock price was collected monthly over the period from 2016 to

2021 from the website: https://vn.tradingview.com/

3.3.2 Data processing methods:

The regression model has 1 dependent variable, 4 independent variables, 72 observations being collected monthly from 2016 to 2021

The model was analyzed by OLS Using OLS, we first test the null hypothesis

of the overall significance of the model using F - statistics and then test the individual statistical significance by p - value We use the 10% significance level to test After that, we will analyze the coefficient of variables and interpret these