Objectives of the studyThis study aims to analyze and evaluate the impact of monetary policy two tools:money supply, and interest rate changes on Vietnam''''s stock market in the period of
FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS Module: Econometrics Major: International Economics THE IMPACT OF MONETARY POLICY ON VIETNAMESE STOCK MARKET Class KTEE218(HK1-2324)1.1 Group Number 11 Instructor PhD Dinh Thi Thanh Binh No Group member Student ID Rate of Contribution Hà Thị Huyền Thư 2214450618 20% Vũ Thị Tố Quyên 2213450066 20% Trần Thị Thuỳ Anh 2214450604 20% Nguyễn Quỳnh Anh 2212450011 20% Hoàng Huyền Trang 2212450078 20% Hanoi, September 2023 TABLE OF CONTENTS CHAPTER 1: INTRODUCTION 1.1 Introduction 1.2 Objectives of the study 1.3 Subjects and scope of the study 1.3.1 Research subjects 1.3.2 Research scope 1.4 Research Methods 1.5 The layout of the topic CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW 2.1 Theoretical Framework 2.1.1 Monetary Policy 2.1.2 Stock price index 2.1.3 Monetary instruments used by the state to change stock price indexes 2.2 Literature review 10 2.2.1 International Studies 10 2.2.2 National Studies 11 2.2.3 Discussion 12 CHAPTER 3: ECONOMETRIC METHODOLOGY 13 3.1 Theoretical model specification 13 3.2 Describe the data 14 3.2.1 Data source 14 3.2.2 Descriptive statistics 15 3.3.3 Correlation matrix between variables and interpretations 16 CHAPTER 4: TEST RESULTS AND DISCUSSION 4.1 Test results 17 17 4.1.1 Testing the overall significance level of model 18 4.1.2 Testing the significance level of each independent variable 18 4.1.3 Testing the fitness of the model 19 4.1.4 Estimating coefficient of variables 19 4.2 Discussions 19 CHAPTER 5: RECOMMENDATIONS 22 5.1 Conclusion 22 5.2 Policy recommendations 23 5.3 Limitations of the research 23 REFERENCES 24 APPENDIX 28 CHAPTER 1: INTRODUCTION 1.1 Introduction The stock market refers to public marketplaces for the issuance, purchase, and sale of stocks that trade on a stock exchange or over-the-counter Stocks, also known as equities, reflect a company's fractional ownership, and the stock market is a marketplace where investors may purchase and sell ownership of such investable assets A well-functioning stock market is considered vital to economic development because it allows enterprises to swiftly acquire funds from the general public The stock market serves two functions: the first is to provide cash for firms to fund and develop their operations, and the second is to provide investors with the chance to 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 2018 to June 2023 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, and interest rate) changes on Vietnam's stock market in the period of time from 2018 to June 2023 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 1.3.1 Researchsubjects Research subjects in this article will include Vietnam's stock market (HNXIndex), the monetary policies of the State Bank of Vietnam 1.3.2 Researchscope ● Space: in Vietnam ● Time: From January 1st, 2018 to June 30th, 2023 1.4 Research Methods The study will use a quantitative research method, based on the OLS regression model to estimate 1.5 The layout of the topic The structure of the thesis consists of five chapters: Chapter 1: Introduction Chapter 2: Theoretical framework and literature review Chapter 3: Research Methodology Chapter 4: Test results and discussions Chapter 5: Recommendations CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW 2.1 Theoretical Framework 2.1.1MonetaryPolicy Monetary policy is the intervention measures of the central bank through monetary tools such as interest rate, reserve requirement, open market, etc to achieve macroeconomic objectives such as controlling inflation, unemployment rate, maintaining a stable exchange rate, economic growth or impact on the stock market, real estate, etc 2.1.2Stockpriceindex Stock price index is a stock quote index that reflects the development trend of the stock market, and 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, VNAllShare We all know that HOSE is the largest stock exchange in Vietnam but recently, the trend is that many businesses listed on HOSE are moving to HNX The reason for the phenomenon of stock transfer from HOSE to HNX is: - HoSE has a large daily trading volume, causing system congestion Recently, when the trading value on HOSE reached the threshold of 12,000 billion, there was a phenomenon of order congestion, blocking operations and opportunities for investors - Prolonged congestion affects the rights of investors when making transactions Therefore, some businesses tend to switch from HOSE to HNX to reduce load Document continues below Discover more from: Econometrics Trường Đại học Ngoạ… 418 documents Go to course 74 Apparel and Footwear in Vietnam(Full Market… Econometrics 13 ON TAP KINH TE Luong revision Econometrics 46 97% (29) 100% (12) Kinh tế lượng - AAA Class Econometrics 100% (6) Ethics - SDaa 31 Econometrics 100% (5) A collection of past 17 exams Econometrics 100% (5) Tut 9.1 trm Econometrics 100% (4) HNX stock exchange is a reliable and reputable address that many investors choose to business with when participating in the market HNX-Index is calculated according to the formula: 𝑛 HNX-Index = ∑ 𝑃1𝑖×𝑄1𝑖 𝑖=1 𝑛 ∑ 𝑃0𝑖×𝑄0𝑖 𝑖=1 In there: P1i: Current market price of stock i, taking the closing price of the latest trading session Q1i: Current listing number of shares i 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 i= 1,2, ,n In Vietnam, all exchanges HOSE, HNX and Upcom take the original market value of 100 2.1.3Monetaryinstrumentsusedbythestatetochangestockpriceindexes MoneySupply(M2) The money supply is the amount of currency in circulation at any particular time, which is usually determined The total amount of currency in circulation comprises not just cash and bank deposits, but also a variety of other liquid assets that are easily converted to cash and frequently accepted in payment transactions The money supply and stock market have a positive relationship, as evidenced by monetary policy The first explanation of this relationship is provided by Friedman and Schwartz (1965), who claim that a rise in the money supply will enhance liquidity and credit for stock investors, resulting in an increase in stock prices Nguyen and Nguyen (2013) also looked into and agreed that money supply and the stock market had a beneficial link Because of the impact of monetary policy, when the money supply expands, surplus liquidity will have a significant impact on the stock market 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 HNX-Index chart in Vietnam from 2006 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 InterestRate 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 CHAPTER 4: TEST RESULTS AND DISCUSSION 4.1 Test results We run a regression model having one dependent variable (lnSTO) and independent variables (lnM2, lnEXC, lnCPI, IR) on Stata 15 ln(STO) = β +β × ln(EXC) +β × ln(M2) +β × ln(CPI) β+ × IR 𝑢 + 𝑖 Run the command reglnSTOlnM2lnEXClnCPIIR, we got the result: Table 4.1: Results from regressing model (Appendix 1) Source SS df Number of obs = 66 ———————————————————— F(4 61) = 50.43 Model 13.4269247 3.35673117 Prob > F = 0.0000 Residual 4.06019079 61 0.066560505 R-squared = 0.7678 ———————————————————— Adj R-squared = 0.7526 Total Root MSE = 0.2579 17.4871155 65 MS 0.269032545 lnSTO Coefficient Standard t P>|t| [95% Conf Interval] error lnM2 2.381871 0.1826803 13.04 0.000 2.016579 2.747162 lnEXC -5.893734 1.600423 -3.68 0.000 -9.093978 -2.69349 lnCPI -3.256176 1.404659 -2.32 0.024 -6.064965 -0.4473872 17 IR -0.0544675 0.0181039 -3.02 0.004 -0.0908761 -0.018474 17.39576 2.39 0.020 6.762719 76.33265 Cons 41.54769 4.1.1.Testingtheoverallsignificancelevelofmodel Establish the hypothesis: 𝐻0 : β0 =β1 =β2 =β3 =β4 2 2 𝐻1 : β0 +β +β +β +β ≠ To test the overall significance level of the model, at 1%, 5%, and 10% significance level, we use p-value (F) testing, we got the result: p-value (F) = 0.0000 < 0.01, 0.05 and 0.1 respectively Therefore, at three significance levels, we all reject 𝐻0 This means that the model has statistical significance at 1%, 5% and 10% significance level 4.1.2.Testingthesignificancelevelofeachindependentvariable To test the significance level of each independent variable, we base on p-value of each variable From the Table 4.1, we got the result: - Variable lnM2 has p-value = 0.0000 < α =0.01, which means lnM2 has statistically significant effect on lnSTO at 1%, significance level - Variable lnEXC has p-value = 0.0000 < α =0.01, which means lnEXC has statistically significant effect on lnSTO at 1% significance level - Variable lnCPI has p-value = 0.024 < α =0.05, which means lnCPI has statistically significant effect at α =5% but p-value=0.024 > α =0.01, which means lnCPI has no statistically significant effect on lnSTO at % significance level 18