THE EFFECTS OF THE UNITED STATES’ UNCONVENTIONAL MONETARY POLICY ON FINANCIAL MARKET AND REAL ECONOMY: EVIDENCE IN VIETNAM

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MOTIVATION OF RESEARCH

Mishkin (2022) stated that central banks worldwide predominantly employ a very short-term interest rate as their primary policy tool In the United States, the Federal Reserve (Fed) conducts monetary policy by adjusting the Federal funds rate According to Federal Reserve (2021), Fed implements monetary policy by employing a number of measures to control financial circumstances that promote progress toward its dual mission goals 1 Monetary policy has a direct impact on short-term interest rates, which in turn affects other financial conditions such as stock prices, the dollar's exchange value, and asset prices Through these channels, monetary policy affects the actions of people and companies, impacting total spending, investment, production, employment, and inflation in the United States Under normal economic circumstances, monetary policy changes short-term interest rates and various actions that central banks take to influence the economy and financial markets However, the effectiveness of conventional monetary policy (CMP) instruments has not yielded the desired outcomes about financial stability, deficit reduction, and debt reduction, particularly considering recent financial and debt crises and the more recent pandemic and its devastating effects on the global economy

In 2008, during the global financial crisis (GFC), and again in 2020, the Federal funds rate reached zero due to economic collapse caused by epidemics, requiring additional stimulus measures How can the Fed and other central banks support the economy when short-term interest rates still are near zero? To address the limitations imposed by the zero lower bound on short-term interest rates, the United States (US) and other advanced economies (AEs) have also introduced new measures known as non-standard monetary policy or unconventional monetary policy (UMP) According to Bernanke (2022), the central bank lowered its short-term interest rate target to zero and committed to keeping it at that level for as long as necessary When short-term interest rates approach the zero-bound (as shown in Figure 1.1), economists refer to this as the "zero lower bound," signifying that the central bank's CMP tool has reached its limit and cannot be further employed to provide stimulus Consequently, not only is it difficult for central banks to reduce interest rates further, but it also becomes challenging to achieve their inflation goals This global crisis has

1 Federal Reserve’s actions, as a central bank, to achieve the “dual mandate” goals specified by Congress: maximum employment and stable prices in the United States

1 CHAPTER 1: INTRODUCTION led to significant disruptions in the financial markets and a severe economic downturn in advanced economies and other countries worldwide

In response to this situation, UMP appeared and played a pivotal role in managing central banks' monetary policies, particularly during prolonged economic crises UMP seeks to impact macroeconomic variables by adjusting medium and long-term interest rates by altering the central bank's balance sheet, providing forward guidance, and implementing negative interest rates One of the most significant tools within UMP is Quantitative Easing (QE) In 2008, the Fed introduced a new tool: Large-Scale Purchases of longer-term securities, specifically government-guaranteed mortgage-backed securities (MBS) In various forms, this tool would play a central role in the monetary strategies of many central banks in the subsequent years (Bernanke, 2022) Implementing Large-Scale Asset Purchase (LSAP) operations has significantly expanded the Fed's balance sheet and affected long-term bond yields During the 2007–2009 financial crisis and the recent pandemic, Fed and numerous other central banks relied extensively on these tools (Bernanke, 2022) Another essential tool is forward guidance, designed to influence financial conditions by shaping market expectations of future monetary policy

Figure 1.1: Zero lower bound as Wu and Xia (2016) measure and policy rate of the US

Source: IFS – IMF data and Wu and Xia (2016) shadow rate

The widespread adoption of numerous UMPs during the GFC brought about significant transformations in both financial markets and the real economy, affecting both advanced economies and the rest of the world, particularly emerging economy markets

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US policy rate Zero lower bound

(EMEs) and developing countries The deployment of UMP tools in AEs reduced bond yields and increased real GDP, stock prices, and the Consumer Price Index (CPI) Additionally, it spurred portfolio flows into other countries, resulting in heightened real output growth and positive responses from the financial markets

The instability in global finance has persisted since the GFC The outbreak of the COVID-19 pandemic in late 2019 delivered a severe shock to economies worldwide Most nations resorted to lockdowns and isolation measures to have the pandemic's spread, resulting in economic stagnation Consequently, global GDP experienced a significant decline in 2019, approximately 3%, and is expected to continue falling sharply in the subsequent years In contrast, during the 2009 financial crisis, the global GDP loss was only 0.1% (Gopinath, 2020) Economies faced a pronounced and enduring increase in unemployment and public debt, and many businesses closed or went bankrupt To mitigate the adverse economic impacts of COVID-19, central banks swiftly implemented a range of robust policies These measures included interest rate cuts, liquidity support for commercial banks, and various forms of support for private sectors In this context, UMP once again played a pivotal role in the policy management of central banks when the pandemic hurt stock markets by reducing stock returns, and CMP did not reverse the adverse impact of the pandemic (Iyke & Maheepala, 2022)

In the United States, as a response to the COVID-19 pandemic, Fed took measures to support the economy in the face of new challenges In March 2020, there were two special sessions of the Federal Open Market Committee (FOMC) intending to bolster economic activity On March 3, 2020, Fed lowered the Federal funds rate, initially from a range of 1.5% to 1.75% to a range of 1% to 1.25% Later, on March 16, the range was further reduced to 0%-0.25% (Tepper & Adams, 2024) In August 2020, the Fed announced significant changes to its monetary policy-making framework process initiated before the pandemic These changes were designed to enhance the potency of monetary policy in an environment where interest rates were already low In subsequent months, the Fed provided further clarity by explicitly stating its commitment to keeping interest rates low for as long as necessary Concurrently, concerns about the virus triggered the worst week in US financial markets since the 2007–2009 financial crisis, serving as a warning signal for the economy (Bernanke,

2022) This is only the second time this interest rate has reached the zero lower bound In this context, it is essential to examine how this UMP affects both the real economy and financial markets in AEs and other countries This analysis can provide valuable insights and implications for dealing with similar situations in the future This analysis is crucial considering the global health crisis caused by COVID-19, which has posed unprecedented challenges to economies worldwide

The United States' new monetary policy operations always serve as necessary signals for central banks in developing countries to adjust their economic policy implementations Gai and Tong (2022) examine the international impact of the information on US’s monetary policy When Fed tightens monetary policy, it reveals a tightened monetary stance and optimism about the economy, raising global output and asset prices Monetary announcements from the US can signal optimism or pessimism, with far-reaching consequences for global economic activity Therefore, the various approaches to this policy have raised significant concerns about their potential international spillover effects on developing countries' real economies and financial markets Identifying which countries are most affected by these US policy decisions is particularly interesting

The United States, one of the countries heavily affected by the pandemic crisis in

2019, has aggressively implemented fiscal and monetary policies to address the epidemic and boost its economy These measures include providing social security support packages, engaging in large-scale government asset purchases, conducting widespread overnight and term repo transactions, and reducing discount lending interest rates The capital inflows from implementing UMP tools in advanced economies can exert pressure on various aspects, including real output, asset prices, foreign exchange rates, and overall financial conditions These inflows also contribute to increased volatility in financial markets and real economic activities The effects of AEs' UMP measures can be transmitted through various channels, such as the portfolio rebalancing channel, the interest rate channel, the exchange rate channel, the asset price channel, and the credit channel Developing countries are particularly vulnerable to economic uncertainty, especially in the face of unexpected changes in monetary policy in AEs

A significant number of empirical studies have analyzed the domestic impact of UMP in advanced economies and its international spillover effects on the rest of the world Many of these studies have primarily focused on examining the response of financial markets within AEs such as (Breedon et al., 2012; Eksi & Tas, 2017; Guerello, 2018; Haitsma et al., 2016; Putniņš, 2022; Rahman & Serletis, 2023; Saiki & Frost, 2014; Weale & Wieladek,

2022), interest rate (Bauer & Neely, 2014; Baumeister & Benati, 2010; Breedon et al., 2012; Jọger & Grigoriadis, 2017)… Another focus on the impact of UMP on the macro economy and economic activity in AEs (Fratzscher et al., 2016; Gambacorta et al., 2014; Jawadi et al., 2017; Meinusch & Tillmann, 2016) These findings make valuable contributions to the empirical evidence However, they have yet to address this issue in the context of a pandemic crisis, nor have they compared the differences between implementing UMP tools to manage a GFC crisis versus a pandemic crisis in various advanced economies, particularly those nations with significant influence on the development of other economies, such as the United States

Moreover, another strand of research concerns the international impact of this policy on EMEs and developing countries, but in limited quantities These studies pay more attention to the financial market in emerging economies, such as interest rates, asset prices, and exchange rates… (Anaya et al., 2017; Apostolou & Beirne, 2019; Bowman et al., 2015; Chen et al., 2014; Chen et al., 2016; Eser & Schwaab, 2016; Gupta & Marfatia, 2018; Tillmann, 2016; Uz Akdogan, 2023; Yilmazkuday, 2022), they also concentrate on the real economy as well (Chen et al., 2017; Fic, 2013; Punzi & Chantapacdepong, 2019) or capital flow (Alper et al., 2020; Chen et al., 2014; Kiendrebeogo, 2016; Le et al., 2022)

While these studies have consistently yielded results such as increased portfolio inflows, heightened output growth, asset price surges, and exchange rate appreciation, their focus has been mainly on EMEs when examining the international spillover effects of advanced economies’ UMP However, it is essential to recognize that, beyond EMEs, other regions warrant investigation as well Some studies on related topics have underscored the critical role played by EMEs and frontier markets, particularly in the context of portfolio flows and the stock market Moreover, the dynamics of international monetary policy spillovers are intricately linked with portfolio rebalancing, asset price channels, and various other channels within the monetary transmission mechanism

RESEARCH OBJECTIVES

The main objective of this study is to analyze the international spillover effects of the unconventional monetary policy of the United States on the Vietnamese financial market and the real economy Regarding the financial market in Vietnam, the primary representative is the stock market The real economy deals with producing, purchasing, and circulating goods and services within an economy

First, this study examines how the Vietnamese financial market reacts to the US’s

UMP announcements during the GFC and the COVID-19 pandemic UMPs are alternative measures to stimulate the economy when conventional tools are ineffective The US’s UMP affects not only its own economy and financial market, which are the largest in the world, but also many other countries through spillover effects This research explores how these effects influence the Vietnamese financial market

Second, this research scrutinizes the response of Vietnam’s real economy to the shocks of the US’s UMP during the global financial crisis and the COVID-19 pandemic While UMP announcements from the US can instantaneously affect the financial market, macroeconomic variables, particularly GDP growth and inflation, exhibit delayed responses Analogous to the financial market’s reaction, the implementation of UMP to bolster the US economy during crises generates spillover effects on other global economies, including Vietnam, via multiple transmission channels

Third, this research delves into the exploration of potential disparities in the international spillover effects of the US’s UMP on Vietnam’s financial market and real economy during two distinct periods of crisis: the global financial crisis and the COVID-19 pandemic

The US resorted to the use of UMP as a response mechanism during both crises However, the contexts of the GFC and the COVID-19 pandemic differed significantly The GFC was primarily a financial crisis, triggered by the subprime mortgage crisis in the US, which led to a global banking crisis On the other hand, the COVID-19 pandemic was a health crisis that resulted in an unprecedented global economic shutdown These differences in the nature of the crises led to variations in the timing, scale, and specific measures of UMP implementation by the Federal Reserve These variations could result in distinct impacts of the US’s UMP on Vietnam’s financial market and real economy The study aims to analyze these impacts in detail, considering factors such as changes in asset prices, exchange rates, and capital flows, and changes in GDP growth and inflation in the real economy The findings of this research could provide valuable insights for policymakers, investors, and researchers interested in the international spillover effects of UMP.

RESEARCH QUESTIONS

To achieve the research objectives above, this study goes to answer three questions corresponding to the specific objectives as follows:

Question 1: Does the Vietnamese financial market react to the US’s UMP announcements in the global financial crisis and the COVID-19 pandemic period?

Question 2: Does the real economy of Vietnam respond to the US’s UMP shocks in the global financial crisis and the COVID-19 pandemic period?

Question 3: Do differences exist in the effects of the US’s UMP on the Vietnamese financial market and real economy between the global financial crisis and the pandemic crisis?

The study's scope is essential since it might affect the reliability of the study Hence, the next part discusses it.

THE SCOPE OF THIS STUDY

This study will investigate how the US’s UMP affects the Vietnamese stock market’s immediate reaction to official UMP announcements and the real economy of Vietnam from

2007 to 2022 Emphasis will be placed on two significant periods: the GFC and the COVID-

First, the purpose of this study is to investigate the spillover effects of UMP on Vietnam, a country that has the characteristics of a frontier financial market and an open, small economy These features make Vietnam a suitable case for analyzing how UMP actions in a major economy can influence the economic and financial conditions in a smaller and less developed economy This study concentrates on the UMP tools that the United States has employed since the GFC The study does not include the UMP tools of other advanced economies, such as the Euro area, Japan, and the United Kingdom, in the analysis

Second, the choice of the study period is essential to ensure the validity and reliability of the statistical model This research will examine the spillover effects of the US’s UMP on

Vietnam’s economy from 2007 to 2022 This period covers the whole span of the US implementation UMP, which started in response to the GFC and the COVID-19 pandemic crisis This period also allows for a comprehensive analysis of how the US’s UMP effects the economic and financial conditions in Vietnam, as well as the role of major events, such as the GFC and the COVID-19 pandemic crisis, in the international transmission of the U.S UMP

Third, this study will examine the immediate response of the Vietnamese stock market to the announcement of the US's UMP implementation, which serves as a proxy for all markets and different sectors 5 , following the announcement of the US’s UMP implementation The analysis will specifically focus on listed stocks on the HOSE, rather than encompassing the entirety of Vietnam's financial markets This emphasis is driven by several considerations:

(i) For the Vietnamese stock market, companies can be listed and if they meet the requirements according to the regulations The stocks of these companies can be listed on two exchanges, HOSE or HNX Due to its formation and development process, as well as its scale, HOSE primarily lists large enterprises from various fields The market capitalization of HOSE as of April 2022 is 13.12 times higher than HNX 6 , so the Vnindex (indicator of HOSE) can be represented the Vietnamese stock market, all companies listed on HOSE can also represent the listed companies on the Vietnamese stock market In addition, with the event study method, when determining abnormal returns (AR) based on the market and risk- adjusted model or the market-adjusted model, if combining all stocks in both stock exchanges, it will not be appropriate when calculating AR because the fluctuation margin on these two stock exchanges is different Specifically, the fluctuation margin of HOSE is +/- 7% while the fluctuation margin of HNX is +/- 10%

(ii) the study employs an event study method and relies on daily data Unfortunately, daily trading data is limited in the Vietnamese bond market

5 The study will analyze the stock price reactions of all industries listed on HOSE, classified according to the GICS industry classification standard The detailed industry classification is presented in Appendix 1

6 According to data published by the State Securities Commission of Vietnam

(iii) in the case of the foreign exchange market, the exchange rate is managed by the central bank, making it challenging to observe immediate fluctuations in response to the US’s UMP events

Finally, this study will examine the response of Vietnam's real economy, a proxy for price index and output, to the US’s UMP shocks The real economy is concerned with creating, purchasing, and moving commodities and services within an economy It contrasts with the financial economy, which focuses only on exchanging money and other financial assets that reflect ownership of or claims to ownership of goods and services from the real economy Since the term "real economy" applies to all real or non-financial components, real variables can be used to model the real economy

Appropriate methodologies, which will be explained in the following section, must discover the correct answers to the research questions.

RESEARCH METHODOLOGIES AND DATA

Research methodology

The event study method (ESM) is a statistical and econometric technique that analyzes the effects of specific events or shocks on financial markets or economic variables Widely used in finance, economics, and related disciplines, this method assesses how particular events impact asset prices, stock returns, and other key financial indicators According to Neely (2015), one must examine asset price changes as announcements or other news change market expectations to evaluate the effects of the UMP As a result, the technique may be applied to examine occurrences instantly ESM is current in addition to having quick access to a wealth of data since asset values, including stock prices, are prospective For that reason, this research employs the ESM to analyze the effects of the US’s UMP announcement on the Vietnam stock market based on the approach of (Galloppo & Paimanova, 2017; Kolari & Pynnonen, 2011; Lubys & Panda, 2021; MacKinlay, 1997; Pacicco et al., 2018, 2021) Results from ESM will answer the first research question In addition, by comparing the research results in two periods, it will also answer part of the third research question, the difference in the effect of the US’s UMP on the Vietnamese financial market in two crisis periods

The structural vector autoregression (SVAR) model to study the effects of the US’s UMP shocks on Vietnam's real economy based on the methodology of (Carrera & Ramírez- Rondán, 2020; Cushman & Zha, 1997; Li et al., 2010; Yildirim & Ivrendi, 2021) The monthly dataset spanning 16 years, from 2007 to 2022, will encompass various implementations of the US’s UMP since the GFC and the onset of the pandemic crisis SVAR has long been regarded as a cornerstone in empirical macroeconomics, enabling the study of expected responses of model variables to one-time structural shocks, such as policy actions or unexpected economic changes (Kilian, 2013) The essence of SVAR is to obtain structural parameters and shocks based on observing the reduced form VAR developed by (Sims,

1980) SVAR allows for as many types of shocks as time series variables in the set by assuming that observable variables are endogenous In contrast, shocks are the impulses that move the system

Consequently, the SVAR model will be used in this research to investigate the international spillover effects of the US’s UMP on the Vietnamese economy from 2007 to

2022 Then, this study will use another variable representing the US’s UMP to replace the previous one to check its robustness These results will answer the second research question

By comparing the research results in two periods, the study will answer the remaining of the third research question, the differences in the effects of the US’s UMP on the real economy of Vietnam in two crisis periods.

Research data

This study has three groups of data:

First, the daily stock index and stock prices in Vietnam from 2007 to 2022 are collected, focusing on defining the event window, event date, and estimation window This data has been sourced from the Ho Chi Minh City Stock Exchange (HOSE)

Second, the announcement days of the US’s UMP announcements in the GFC period based on the research of the Fed and (Bowman et al., 2015), the event days in the COVID-

19 pandemic period based on the Fed and (Clarida et al., 2021)

Third, the data proxies for the US’s UMP and international transmission channels and

Vietnamese macroeconomic data spanning the period from 2007 to 2022 The monthly data on the total assets of the Federal Reserve's balance sheets and the VIX index were sourced from the Federal Reserve Bank and the Chicago Board Options Exchange (CBOE), respectively Additionally, data on foreign portfolio investment flows to Vietnam were obtained from the IMF For Vietnam's monthly macroeconomic indicators, including market interest rates, the nominal exchange rate of USD/VND, Vietnam's output, and inflation, data from 2007 to 2022 were collected from the IMF

Finally, in the section assessing the over view of the Vietnamese financial market in the period from 2000 to 2022, in addition to the daily stock index data introduced above, the study also uses data on the number of listed companies, market capitalization value, and trading volume from HOSE to analyze the overview of the Vietnamese financial market which represented by the stock market.

RESEARCH CONTRIBUTIONS

The main contribution of a study that examines the effects of the US’s UMP on the Vietnamese financial market and the real economy In detail, there are four contributions of this thesis:

First, this research stands as one of the limited scholarly works that delve into the exploration of the influence exerted by the UMP of the United States on a frontier market, specifically Vietnam Frontier markets, such as Vietnam, are less mature than emerging markets and often show rapid economic growth, making them an interesting area of study in the context of international monetary policy spillover effects This research aims to fill this gap by providing an in-depth analysis of the UMP’s impact on Vietnam’s financial market and real economy Furthermore, the findings of this study could have significant implications for the development of effective monetary policies and investment strategies in frontier markets Therefore, this research not only contributes to academic knowledge but also has practical relevance for economic policy and investment decision-making

Second, this research employs a multifaceted approach to examine the effects of the

US’s UMP by utilizing a range of proxies These proxies include UMP announcements, which provide insights into the policy intentions of the Fed, the total assets of the Fed’s balance sheet, which reflect the scale of the UMP; and the shadow short rate, which is a measure that captures the stance of monetary policy when nominal interest rates are at the zero lower bound In addition to these proxies, the study also conducts robustness tests on the results Robustness tests are crucial in empirical research as they check the reliability of the results under different assumptions or methodologies By conducting these tests, the study ensures the validity and reliability of its findings

Through this comprehensive and rigorous approach, the study provides an in-depth understanding of the impact of the US’s UMP on Vietnam It sheds light on how changes in UMP in the world’s largest economy can have spillover effects on a frontier market like Vietnam This contributes to the broader understanding of international monetary policy transmission and can inform policy decisions in both developed and frontier markets

Third, this research makes a significant contribution to the existing body of literature by providing a comparative analysis of the potential differences in the effects of the US’s UMP during two distinct periods of economic crisis: the GFC and the COVID-19 pandemic The UMP, which was employed by the Fed during both crises as a response mechanism However, the nature of these crises was fundamentally different - the GFC was primarily a financial crisis, while the COVID-19 pandemic was a health crisis that led to an economic downturn These differences in the nature and context of the crises could potentially lead to variations in the effects of the UMP By analyzing these variations, this study provides empirical evidence on how the impacts of UMP can differ across different crisis contexts Furthermore, the findings of this research could have implications for other countries, particularly those with economies that are intricately linked to the US economy Thus, this research has both academic and practical relevance, contributing to the literature on international monetary policy transmission and informing policy decisions in the real world

Lastly, the research reveals that both the financial market and the real economy in

Vietnam exhibited a positive response to the shocks induced by the US’s UMP, particularly during the GFC and COVID-19 pandemic Furthermore, the study identifies the risk-taking and portfolio rebalancing channels as critical conduits for the transmission of UMP’s spillover effects.

THE STRUCTURE OF THE STUDY

The study is structured into five chapters as follows:

This chapter provides an overview of the research background and motivation, research objectives and questions, research scope, and the structure of the study

This chapter presents an overview of the theoretical framework of unconventional monetary policy, including its instruments and international transmission channels It also reviews relevant literature on the topic

In this chapter, the study introduces the research methods used to investigate the impact of the US’s UMP on the Vietnamese financial market and the real economy The research data and data sources are also presented in this chapter

This chapter presents the results obtained from the event study method (ESM) and structural vector autoregression (SVAR) It analyzes the research findings to elucidate the impact of the US’s UMP on the Vietnamese financial market and the real economy

Chapter 5: Conclusions and policy implications

The last chapter offers conclusions, research contributions, and policy implications based on the research findings It also outlines the study's limitations and suggests directions for future research

This chapter introduces the research topic, which examines the impact of the US’s UMP on the Vietnamese financial market and the real economy The chapter begins by providing an overview of how central banks use short-term interest rates as their primary policy tool and how conventional monetary policy (CMP) instruments have limitations in stimulating the economy during crises The chapter emphasizes the importance of understanding the spillover effects of UMP on developing and frontier markets, such as Vietnam The research objectives are to analyze the effect of the US’s UMP on Vietnam and to identify potential differences in response during the global financial crisis (GFC) and the COVID-19 pandemic The scope of the study is outlined, focusing on the period from 2007 to 2022, which covers the US implementation UMP during the GFC and the COVID-19 pandemic The chapter concludes by describing the structure of the entire thesis, which includes theoretical frameworks, literature review, research results, and policy implications.

CONCEPTUAL FRAMEWORK

Conventional monetary policy

Monetary policy is a fundamental tool utilized by governments and central banks to manage the flow of money within an economy This policy framework encompasses the actions and decisions designed to regulate the overall money supply, its accessibility, and prevailing interest rates The Cambridge Dictionary accurately defines monetary policy as

"monetary actions taken by a government to control the amount of money in an economy and its availability, for example, by changing the interest rate.”

Meanwhile, Federal Reserve (2021) defines monetary policy refers to the actions of central banks to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth Its main policy tools are the target for the federal funds rate (the rate that banks charge each other for short-term loans), a key short-term interest rate Bank of England (2020) provides another definition, that monetary policy is an action that a country’s central bank or government can take to influence how much money is in the economy and how much it costs to borrow European Central Bank (2021) also defines

‘monetary policy’ as the decisions taken by central banks to influence the cost and availability of money in an economy

From the above concepts, we can understand that conventional monetary policy is a macroeconomic management policy in which the central bank uses tools that affect operational objectives, modifying the money supply and interest rates influencing monetary policy's ultimate purpose: price stability, economic growth, and employment The monetary policy objective is to deliver price stability and consequently support the macroeconomic objectives, including growth and employment (Mishkin, 2022)

Mishkin (2022) indicated that (i) open market operations, (ii) discount lending, and (iii) reserve requirements are the three monetary policy instruments used by the Federal Reserve to control the money supply and interest rates Together, these three instruments - open market operations, discount lending, and reserve requirements - form the backbone of what is commonly referred to as classic or conventional monetary policy tools They are the

2 CHAPTER 2: LITERATURE REVIEW primary means by which the Federal Reserve manages the money supply and interest rates, thereby influencing economic activity a Open market operations

An open market operation is a monetary policy instrument that central banks use to manage and control the amount of money in circulation This is achieved through the purchase or sale of government securities, such as treasury bonds

When the central bank buys these securities in what is known as a buying operation, it effectively injects money into the economy This is because the money used to purchase the securities goes into the banking system, thereby increasing the number of reserves and base money available As a result, the overall money supply in the economy increases Furthermore, this increase in the money supply tends to lower short-term interest rates, making borrowing cheaper and encouraging spending and investment

Conversely, when the central bank sells these securities in a selling operation, it essentially takes money out of the economy The money received from the sale of the securities is removed from the banking system, leading to a decrease in reserves and base money This reduction in the money supply has the effect of increasing short-term interest rates, making borrowing more expensive and discouraging excessive spending and investment

According to Mishkin (2022), open market operations, the principal drivers of the primary causes of fluctuations in the money supply, are fluctuations in interest rates and the monetary base, which were the most significant conventional monetary policy tools before the global financial crisis There are two types of open market operations: defensive open market operations and dynamic open market operations Defensive open market operations seek to offset changes in other variables that affect reserves and the monetary base The goal of dynamic, open market operations is to change the number of reserves and the monetary base

In summary, open market operations are a crucial tool for central banks to regulate the money supply and control interest rates, thereby maintaining economic stability and promoting sustainable economic growth b Discount lending

The discount window is the location where the central banks can provide reserves to banks—examining how the discount window functions can help you better grasp how the central bank influences the amounts of borrowed reserves The term “discount window” refers to the mechanism through which central banks can supply reserves to commercial banks Understanding how the discount window operates can provide valuable insights into the ways in which a central bank can influence the volume of borrowed reserves within the banking system

Primary credit is the most significant form of discount lending in the context of monetary policy It is a standing lending facility that allows financially stable banks to borrow from the central bank’s primary credit facility These loans are typically of extremely short duration, often just overnight This facility is designed to provide banks with a reliable source of liquidity, enabling them to meet their short-term funding needs and maintain their day-to- day operations (Mishkin, 2022)

Secondary credit is given to banks in financial trouble with major liquidity problems Seasonal credit is offered to meet the needs of several local banks in vacation and agricultural areas with seasonal deposits The seasonal credit interest rate is determined by averaging the federal funds rate and certificate of deposit rates (Mishkin, 2022) c Reserve requirements

Banks maintain accounts at the central bank, where they hold their deposits These deposits, also known as reserves, play a crucial role in the banking system and are subject to regulations set by the central bank

The total reserves held by a bank are divided into two distinct categories The first category is the required reserves, which are the minimum number of reserves that a bank is mandated to hold by the Federal Reserve, the central bank of the United States This requirement is intended to ensure that banks have enough liquidity to meet their short-term obligations and to provide a buffer against potential financial shocks The second category is excess reserves, which are reserves that banks choose to hold over and above the required minimum Banks may choose to hold excess reserves for a variety of reasons, such as to provide additional liquidity, to earn interest, or to meet unexpected cash outflows (Mishkin,

According to Mishkin (2022), changes in the reserve requirement ratios affect the money supply by changing the multiplier of the money supply A rise in reserve requirements restricts the number of deposits held by a given monetary base level, leading the money supply to contract Increases in reserve requirements boost reserve demand and raise the federal funds rate On the other hand, a reduction in reserve requirements causes the money supply to expand and the federal funds rate to fall Changes in reserve requirements are currently very seldom utilized as a monetary policy instrument since it is expensive for banks to alter their reserve holdings when reserve requirements change

2.1.1.3 Transmission mechanism of conventional monetary policy

Unconventional monetary policy

In normal times, CMP dominates as an effective tool in implementing the central bank's monetary policy They are implemented via short-term interest rates or adjusting aggregate money by operations on the open market However, they have had demerits in recent years and ceased to be effective, especially when the global economy suffered several crises that strongly influenced national growth and social issues Mishkin (2022) showed two reasons for central banks to use UMP Firstly, a negative economic shock can result in an effective-lower-bound dilemma in which the central bank cannot significantly lower its policy rate (the Federal funds rate) below zero Secondly, the central bank's capacity to stimulate economic growth is limited because of the disruption of financial markets, resulting in the inability to move cash to people and businesses with viable investment prospects, reducing economic activity Another reason is in a “new normal,” in which inflation that is too low can be as concerning as inflation that is too high, and in which a low, neutral interest rate, by limiting the space for short-term rate cuts, severely reduces the potency of traditional monetary policies (Bernanke, 2022) For both reasons, central banks require non-interest- rate measures, often known as non-standard monetary policy or unconventional monetary policy instruments, to stimulate the economy after the GFC and the COVID-19 pandemic

Reserve Bank of Australia (n.d) provides the following definition of Unconventional Monetary Policy that it is a collection of actions implemented by a central bank to meet extraordinary economic conditions when typical monetary policy instruments are insufficient These unconventional measures are used when traditional tools, such as policy interest rates, minimum reserves, and open market operations, do not have the desired impact According to Smaghi (2009), UMP is defined as policies that directly target the cost and availability of external finance for banks, households, and non-financial companies These financial sources include central bank liquidity, loans, fixed-income securities, or equity

In summary, UMP can be understood as a set of measures taken by central banks to address abnormal economic conditions CBs only resort to these measures if conventional monetary policy tools, such as short-term interest rates, reserve requirements, and open market operations, fail to achieve the desired outcomes (Ngô & Nguyễn, 2020) According to Bhattarai and Neely (2022), many central banks, most notably the Federal Reserve (Fed), the Bank of England (BOE), the European Central bank (ECB), the Bank of Japan (BOJ), the Swiss National Bank (SNB), the Swedish Central bank (Riksbank), and the Danish National Bank (DNB) have employed UMP

There are four main unconventional monetary policy tools that central banks use to stimulate the economy after crises in which traditional monetary tools cannot work: (i) liquidity provision, (ii) asset purchases, (iii) forward guidance, and (iv) negative interest rates (Mishkin, 2022) According to Bhattarai and Neely (2022), the most important of these have been broad asset purchases, i.e., QE, and communication with the public, i.e., forward guidance (FG), to reduce medium- and long-term interest rates Table 2.1 shows the UMP tool used by major central banks worldwide in recent decades

Table 2.1: Unconventional monetary policy tools used by major central banks

Tools BoE BoJ ECB Fed

Expansion of lender of last resort facilities ✓ ✓ ✓ ✓

Source: Fiebiger and Lavoie (2021) a Expansion of lender of last resort facilities or liquidity provision

In response to the GFC, many central banks have made significant changes to their current market operations to deal with financial market turmoil that has become less liquid (i.e., assets cannot be easily converted into cash) Changes in the operations of central banks include:

- The Discount Window Expansion: the discount window is a facility that Fed uses to help commercial banks enhance their short-term liquidity by allowing them to borrow directly from the Fed, then they will pay Fed discount rate The expansion of the discount window appeared during the GFC period; Fed cut the discount rate by many basis points (25-50 basis points) from August 2007 to March 2008 (Mishkin, 2022)

- Term Auction Facility (TAF) is a program set by Fed to help increase the liquidity of the

US credit market These loans are usually less than one month TAF allows depository institutions to auction amounts of collateral-backed short-term loans Using TAF is more optimal than discount windows as it will enable financial institutions to borrow at a lower rate than the discount rate That rate is decided more competitively than the central bank's penalty interest rate (Mishkin, 2022)

- New Lending Programs: This program promoted liquidity in the financial system by broadening lending objects, such as investment banks, instead of traditional depository institutions New lending programs led to the expansion of the Fed’s balance sheet since the beginning of 2008 b Forward guidance

According to Bernanke (2022), in addition to QE, in recent years, Fed and almost all other major central banks have relied heavily on forward guidance or communication by policymakers about how they expect the economy and policy to evolve This is one of the central bank's tools to convey messages to the public about its future monetary policy, and on that basis, to influence the financial decisions of households, firms, and investors It includes providing information regarding future policy implementation to influence policy expectations and announcing the willingness of central banks to pursue non-standard monetary policy in the long run The main driver of forward guidance is reinforcing the central bank's commitment to low-interest rates, which may help push down long-term interest rates Overall, forward guidance helps reduce uncertainty over a country's economic and financial prospects For instance, Fed has committed to keeping the Fed funds rate at zero for an extended period With such a commitment, short-term interest rate forecasts in the market in the future are lowered, resulting in the decline of the long-term interest rate

The fundamental insight motivating forward guidance is that financial conditions depend on the current short-term policy rate and market expectations of future rates If market participants believe the funds rate will increase, they will also bid up long rates, tightening financial conditions For the same reason, if they come to expect a lower funds rate in the future, they will bid down longer-term rates To the extent that forward guidance influences expectations, it can become an additional policy lever Although most forward guidance is aimed at financial markets, in principle, central bank pronouncements could also affect broader public expectations c Asset purchases or quantitative easing

Purchasing assets of central banks is usually conducted on the open market, with assets only consisting of short-term government securities But all has changed since the GFC; central banks began performing a range of LSAP, also called QE According to Bernanke (2022), QE as large-scale purchases by the central bank of longer-term securities, aimed at reducing longer-term interest rates, easing financial conditions, and, ultimately, achieving macroeconomic objectives such as full employment and price stability Central banks use this program with long-term private sector assets to directly affect asset prices QE is characterized as a strategy that increases the central bank's balance sheet to raise the amount of money available from the institution (in particular, bank reserves) in the economy The goal was to expand the amount of money in the economy by purchasing financial assets from the private sector This would lead to an increase in nominal spending and ensure that inflation was on pace to reach the CPI inflation target over the medium run QE appears to work in practice, affecting financial markets—and, through them, the economy—via two broad channels: the portfolio-balance channel and the signaling channel (Bernanke, 2022)

According to Gagnon et al (2018) and (Bernanke, 2022), the primary channel through which LSAPs appear to work is by affecting the risk premium on the asset being purchased

By purchasing a particular asset, a central bank reduces the amount of the security that the private sector holds, displacing some investors and reducing the holdings of others while simultaneously increasing the amount of short-term, risk-free bank reserves held by the private sector For investors to be willing to make those adjustments, the expected return on the purchased security must fall Put differently, the purchases bid up the asset's price and lower its yield This pattern was described by (Tobin, 1958, 1969) and is commonly known as the “portfolio balance” effect According to Bernanke (2022), besides its effects on the relative supply of securities in private hands, QE also works through what has become known as the signaling channel

According to M A Joyce et al (2011), QE is sometimes contrasted with a strategy known as credit easing, which changes the asset allocation on the central bank's balance sheet, for example, by alternating between government bonds with short and long maturities or by investing in risky private assets like corporate bonds or stocks Both are parts of the central bank's policy, although balance sheet expansion was given priority d Negative interest rates

Negative interest rate policy occurs when the nominal interest rate falls below 0% for a specific economic sector (International Monetary Fund, 2020) After the GFC, central banks of AEs, such as the ECB and BOJ, set up a negative interest rate on their deposits It means banks had to pay interest to their central banks instead of receiving it Central banks would also institute negative deposit rates to encourage banks to shift toward higher-yielding assets and narrow asset purchases to improve functioning in specific markets (Bhattarai & Neely, 2022) This leads to an essential purpose in encouraging lending bank deposits to households and firms, stimulating investment, and raising output

2.1.2.3 Transmission mechanism of unconventional monetary policy

According to M A Joyce et al (2011), central bank can boost the liquidity of balance sheets in the private sector by injecting cash into the economy in exchange for other assets This increased liquidity may affect the economy in numerous ways QE is the most essential tool of UMP The effects of QE on the real economy were argued to operate through traditional neoclassical channels mainly: user cost of capital or Tobin’s q, wealth effects, and the exchange rate (Bernanke, 2010; Yellen, 2011) The details of the transmission mechanism of QE are presented in Figure 2.2 Additionally, there are several channels that UMP transmits to the economy These transmission channels are quietly various but popular in theoretical literature a The signaling channel

Financial market and real economy

Financial markets are where people buy or sell a variety of financial assets, including stocks, bonds, currencies, and derivatives Financial markets help the economy by allocating resources, producing liquidity, and determining the values of various financial assets According to Madura (2021), a financial market is a place where financial assets (securities) like stocks and bonds may be bought and sold In financial markets, funds are transferred when one party purchases financial assets that were previously owned by another party Financial markets promote the flow of capital, enabling financing and investment by people, businesses, and government organizations Financial markets come in a variety of forms, including stock, bond, foreign exchange, and derivatives markets Every market has unique features, purposes, and players

Mishkin (2022) stated that the basic function of financial markets is to channel funds from savers who have an excess of funds to spenders who have a shortage of funds Financial markets can do this either through direct finance, in which borrowers borrow funds directly from lenders by selling them securities, or through indirect finance, which involves a financial intermediary that stands between the lender-savers and the borrower-spenders and helps transfer funds from one to the other According to Madura (2021), financial markets' primary purpose is to transfer money from savers with excess funds to spenders with insufficient finances Financial markets can accomplish this through two different methods: indirect finance, which involves a financial middleman acting as a bridge between lender- savers and borrower-spenders to facilitate the transfer of funds between them, and direct finance, in which borrowers obtain funds directly from lenders by selling them securities The efficiency of our economy, the conduct of firms, and the wealth of individuals are all directly impacted by financial markets Particular attention should be paid to three financial markets: the bond market, which sets interest rates; the stock market, which influences people's wealth and businesses' investment decisions; and the foreign exchange market, which affects the U.S economy significantly due to fluctuations in the foreign exchange rate The globalization of financial markets has accelerated at a rapid pace in recent years Financial markets have become increasingly integrated throughout the world (Mishkin, 2022)

There are different ways to classify financial markets, depending on the criteria used The most common classification criteria are claim on the issuer, other criteria can be mentioned: as maturity of claim, nature of claim, organizational structure, etc These criteria are academic in classification of financial markets However, with other levels of development of the financial market in the world, financial institutions offer a more practical classification method According to MSCI (2023), by grouping markets according to common characteristics, we are helping investors better understand and compare different markets MSCI communicates the list and analysis of equity markets under each category (Developed, Emerging, Frontier 7 and Standalone markets) Financial institutions such as FTSE, MSCI, S&P and Russell also divide the financial markets of countries around the world according to the 4 groups above

According Chen et al (2022), a frontier market is a country that is more established than the least developed countries but still less established than the emerging markets because it is too small, carries too much inherent risk, or is too illiquid to be considered an emerging market A frontier market is a market that has smaller market capitalization and liquidity, and they tend to have a lower correlation with price movements in other emerging and developed markets Since they are growing at an even quicker pace, this younger generation is destined to become tomorrow’s more mature emerging markets Frontier markets are geographically and economically diverse and are found all over the world – in Africa, Asia, Latin America, and central and eastern Europe The countries include Nigeria, Kenya, Egypt, Saudi Arabia, Bangladesh, Vietnam, Kazakhstan, Romania, Argentina and many more – over

40 in total (Serkin, 2015) These countries have been under-researched or ignored as they were too small and perceived as being too risky or difficult to enter because of foreign exchange restrictions and other investor barriers

7 In this section, the study only focusing on the frontier market to clarify the purpose of researching

Figure 2.4: Some frontier markets in the world

Frontier markets are attractive to investors who seek high returns and low correlations with other markets, but they also entail higher risks and lower liquidity than emerging or developed markets According to (Serkin, 2015), over the past 25 years we’ve seen emerging markets grow into a multi-trillion dollar asset class But today, we can invest in a whole new set of emerging markets: the frontier markets

Frontier markets are not only growing faster – they also have a number of characteristics that make them safer than imagined They have lower debt and higher foreign- exchange cash piles in relation to their gross domestic product According to (Andrikopoulos et al., 2016), frontier markets have now become a popular investment class among institutional investors internationally, with major financial services providers establishing index-benchmarks for this market-category The anticipation for frontier markets is optimistic uncertainty, and many people believe that, given their growth rates, these markets will be economic success stories

Some studies also show that the investment efficiency in this market is better than some developing markets Sukumaran et al (2015) finds that there are significant benefits for the Australian investor from diversifying into frontier markets However, the benefits to the US investor are much higher than that of an Australian investor The results from the holding out period also present significantly higher benefits to the US investor compared to the Australian investor In addition, shocks from developed countries also affect this group of markets, especially in crisis periods rather than normal periods (Samarakoon, 2011)

According to Cambridge Dictionary, the concept of real economy is the part of a country's economy that produces goods and services, rather than the part that consists of financial services such as banks, stock markets, etc The real economy is focused on the activities that allow human beings to directly satisfy their needs and desires, apart from any speculative considerations

According to Pirounakis (1997), a broad definition of the ‘real’ economy involves the production, transportation, and selling of goods and services — as opposed to the exchange of paper assets, which is the concern of the ‘paper’ economy of the world of finance A narrower definition would focus on material goods only, sectors like industry, commerce, agriculture, shipping, supermarkets, construction Either way, the ‘real’ economy, directly or indirectly, is, and always will be, the foundation of the economy

Output is an important indicator to measure the real economy Output is demanded by firms, by households, by the government and by foreigners Since interest rates and bank lending affect the demand for output, the financial sector interacts with the real economy (Begg et al., 2014) Krugman and Wells (2018) states that the concept of economic growth as the growing ability of the economy to produce goods and services As we saw, economic growth is one of the fundamental features of the real economy Therefore, the important indicator to measure GDP is the gross domestic product (GDP) or GDP growth, which reflects the productive capacity and efficiency of an economy, as well as the living standards of its population In addition, indicators such as: industrial production index (IPI), consumer price index (or inflation), unemployment rate, balance of payments can also be used to measure the real economy.

THEORETICAL FOUNDATIONS OF THE STUDY

The Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH) was formulated by Eugene F Fama in his research titled 'Efficient Capital Markets: A Review of Theory and Empirical Work,' published in 1970 Fama (1970) proposed that a market is considered 'efficient' when prices consistently and fully incorporate all available information In other words, this theory's heart is the argument that stock prices reflect all available information, and it is difficult to regularly outperform the market by employing any information that is already publicly available

In Fama (1970) framework, he categorizes market efficiency into three levels: weak form, semi-strong form, and strong form (as presented in Figure 2.5)

Weak form efficiency implies that market prices reflect all publicly available information

Semi-strong form efficiency means market prices incorporate publicly available and immediate or real-time information In other words, when new information is released, stock prices adjust instantly to this information

Strong form efficiency is at the highest level, where market prices reflect all public and non-public information, including internal company information

Source: Summary by the author

Cannot “beat the market” using market (price and volume) information

Cannot “beat the market” using either market information or other publicly available information

Cannot “beat the market” using any public or private information

Figure 2.5: Three level of efficient market

According to Bodie and Kane (2020), the EMH posits that financial markets swiftly and efficiently incorporate all available information about securities Consequently, the security price typically reflects all information accessible to investors regarding its value This hypothesis suggests that a security's price rapidly adjusts in response to newly available information, ensuring it consistently equals the consensus market assessment of its value In an efficient market, there would be no overvalued or underpriced securities

The EMH theory reinforces the basis for the reactions of the financial market to announced information Specifically, when announcements are related to macro policies, UMP will immediately impact the financial market, including the stock market This theory explains the signaling channel and confidence channel in the transmission of monetary policy.

Taylor rule

The Taylor Rule was created by a researcher named John B Taylor - a Professor at Stanford University He conducted empirical research on the Fed funds rate over ten years, from 1980 to 1990, and found that the Fed funds rate fluctuation followed a rule related to inflation and economic growth According to Taylor (1993), the Fed funds rate needs to be adjusted by changes in the output gap (the difference between the potential and real GDP in a period) and the inflation gap (the difference between present and goal inflation rates) in the economy

Taylor Rule can be presented as follows:

- it : the FED funds rate target

- i * t : the real Fed funds rate at equilibrium

Formula (2.1) illustrates that changes in the real GDP growth rate and the inflation rate play a crucial role in determining Fed policy adjustments Consequently, interest rates are modified when these economic variables deviate from their trends (in the case of GDP) and their target levels (in the case of inflation) As mentioned earlier, central banks conduct monetary policy by establishing short-term interest rate targets Therefore, their primary objectives include the control of inflation and the stabilization of output Central banks aim to maintain low and stable inflation while minimizing significant fluctuations in output through interest rate tools The Taylor Rule is an essential basis for adjusting the interest rates of central banks in monetary policy operations to achieve GDP growth and inflation targets

AEs that follow the Taylor Rule can influence global monetary conditions which set the pace for global interest rates When these economies adjust their interest rates based on the Taylor Rule, it can influence global capital flows Investors may move their investments to countries with higher interest rates, affecting the global distribution of capital (Hofmann

& Bogdanova, 2012) This can influence international capital flows as investors seek higher returns in countries with higher interest rates.

Asset pricing by discounted cash flow

Discounted cash flow (DCF) valuation is a financial analysis method used to determine the value of an investment or business by estimating the present value of its future cash flows It is widely used in finance and investment decision-making processes This was first introduced by (Williams, 1938), Williams suggested utilizing "evaluation by the rule of present worth" to determine an asset's value Common stock's value is the present value of its future net cash flows—selling price and dividend payments A stock's value under certainty is consequently equal to the discounted value of its future dividends The following formula shows this:

CFt: The cash flow of stock at time t r: the discount rate

The discount rate is usually derived using the capital asset pricing model (Markowitz, 1952; Sharpe, 1964) or the arbitrage pricing theory (Roll & Ross, 1980) An essential thing in the model of discounting cash flow is that when everything is constant, the discount rate decreases and will increase the stock price for two reasons: First, interest rates directly affect discount rates used by market participants to discount future cash flows Lower interest rates from QE lead to lower discount rates and higher expected future cash flows This should increase stock prices (Joyce et al., 2011; Kapp & Kristiansen, 2021) Second, interest rates alter the cost of borrowing for companies and their clients and thus also affect future cash flows Low interest rates decrease the cost of borrowing, enabling companies to borrow money at a lower cost, which can increase their available cash flow.

Milton Friedman's money demand theory

Keynes (1936) highlighted the importance of interest rates through the liquidity preference theory, a theory of money demand He concentrated on the motivation for people to hold money He identified three motives for the demand for money: transactions, precautionary, and speculative Friedman (1970) proposed the demand for money, in real terms, for the ultimate wealth holder is a function that is exhibited as follows:

P : the price index implicit in estimating national income at constant prices y : national income in constant price w : the fraction of wealth in nonhuman form (or the fraction of income derived from property) rm : the expected nominal rate of return on money rb : the expected nominal rate of return on fixed-value securities, including expected price changes re: is the expected nominal rate of return on equities, including expected price changes (1/P) (dP/dt) is the expected rate of change of prices of goods and hence the expected nominal rate of return on real assets, and u is a portmanteau symbol standing for whatever variables other than income may affect the utility attached to the services of money

Each rate of return stands, of course, for a set of rates of return For some purposes, it may be essential to classify assets still more finely, for example, to distinguish currency from deposits, long-term from short-term fixed-value securities, risky from relatively safe equities, and one kind of physical asset from another (Friedman, 1970)

According to Friedman (1970), for demand by business enterprises, rates of return on money and alternative assets are highly relevant to business enterprises These rates determine the net cost to them of holding the money balances However, the appropriate rates may be quite different from those that are relevant for ultimate wealth holders For example, rates charged by banks on loans are of minor importance for wealth holders yet may be extremely important for businesses since bank loans may be a way to acquire the capital embodied in money balances So, interest rates are an essential factor that determines the money demand.

Tobin’s q theory

Tobin (1969) developed Tobin's q Theory, which explains the impact of monetary policy on financial asset prices (stocks) and then transmits the effect on other variables in the economy regarding the transmission channel of monetary policy Tobin's q equals the market value of a company divided by its assets' replacement cost

If q is high, the firm's market value is higher than the capital replacement cost This will stimulate firms to invest in new assets such as factories and equipment because their prices are cheap compared to the market value of the shares Therefore, when the ratio of q is high, enterprises are willing to issue new shares to purchase more assets for their operations, increasing social investment and increasing output

Monetary easing policy can increase the q ratio through two channels First, low- interest rates will not encourage investors to deposit money in banks, and investors can borrow more capital at lower costs than before Investors must look for other more attractive investment channels, including the stock market Therefore, the stock price may increase due to demand-pull Second, low interest rates also make fixed interest rate instruments such as bonds less attractive than stocks; investors may also switch from the bond channel to the stock channel In summary, easing monetary policy will increase stock prices and, therefore, increase the q ratio, and as a result, investment also increases.

Another reason is that when the central bank conducts easing monetary policy (M↑), the stock price tends to increase, resulting in increasing q ratio (Q↑) and new investment demand (I↑), output thus increasing (Y↑)

Tobin’s q theory helps explain the stock market fluctuations before changes in interest rates and money flow between portfolio rebalancing channels This happens not only domestically but also spreads to other international markets This theory also provides a basis for increasing in asset prices and GDP growth through different transmission channels.

The Mundell-Fleming-Dornbusch model

From the IS-LM model, Mundell (1963) researched the theoretical and practical implications of the increased capital flows in the assumption of an open economy with flexible exchange rates When the central bank implements the expansion of monetary policy, this leads to the expansion of money and credit, thereby reducing interest rates However, a capital outflow that results in a deficit in the balance of payments and a depreciation of the exchange rate prevents the interest rate from falling In turn, exchange rate depreciation (normally) improves the trade balance and generates income and employment through the multiplier effect Therefore, monetary policy significantly impacts income and employment levels—not because it changes the interest rate, but because it encourages capital outflows, depreciates the currency's value, and results in an export surplus Also during this time, (Fleming, 1962) developed a similar model Therefore, this model is called Mundell-Fleming model

The Mundell-Fleming-Dornbusch (MFD) model was considered by Rüdiger Dornbusch when it came to international monetary policy analysis A significant improvement was the contribution of Dornbusch (1976), who added rational expectations on the exchange rate movements and a sluggish adjustment of prices The MFD model predicts that an expansionary domestic monetary policy results in an exchange rate depreciation in a world with flexible exchange rates This model illustrates the change in an exchange rate through import price, resulting in the alteration of global expenditure under perfect capital mobility This approach relates to trade balance movements and emphasizes that the exchange rate channel is quietly crucial in open economies An essential outcome of MFD was the nominal exchange rate overshooting following a monetary shock

The theoretical foundations discussed above were used to analyze the effects of unconventional monetary policy on the specific economy They offer a framework for comprehending the cross-border transmission of unconventional monetary policy EMH suggests that domestic and international markets rapidly respond to central bank actions like quantitative easing announcement The Taylor Rule helps analyze how policies that deviate from typical interest rate adjustments impact global markets DCF models are influenced by central bank interest rate manipulations, changing asset valuations and investment decisions internationally Friedman's theory highlights that changes in interest rates from unconventional policies affect money demand globally, with potential spillover effects through trade and finance Tobin's q theory demonstrates how altered asset prices due to these policies influence investment and cross-border capital flows Finally, the Mundell-Fleming- Dornbusch Model illustrates how exchange rate fluctuations and interest rate differentials resulting from unconventional policies transmit their impact across countries, affecting the real economy around the world

The spillover effects of UMP from developed countries on the financial markets and real economies of other countries have been extensively analyzed through empirical studies These effects differ across groups of countries such as between AEs, AEs and EMEs, etc and depend on the specific economic variables being studied No single theory can fully explain the impact of UMP on both financial market variables and the real economy, or its effects on specific countries Therefore, a combination of economic theories is needed to provide a comprehensive understanding.

LITERATURE REVIEW

The effects of unconventional monetary policy

Unconventional monetary policy is examined from various points of view and methods in financial contexts They only focus on the effects of these policies on several aspects of the economy In general, the literature can be divided into three different strands and those fields are also the current issues that almost all researcher’s concerned: (i) the effects of the unconventional monetary policy on themselves, (ii) the international spillover effects of the unconventional monetary policy on others, and (iii) the research on UMP during crises, especially during pandemic crisis cause by COVID-19 Not only does the US implement UMP, but also other AEs These developed countries include countries such as the US, Japan, and England There are also ECB representing European developed countries because these countries use the common currency and are under the general management of the ECB

The first strand of this research topic is the effects of the unconventional monetary policy on themselves Regarding the impact of UMP, numerous studies concentrate on its effects within representative developed countries, such as the United States, the United Kingdom, Japan, and the Euro Area These studies primarily explore the consequences of UMP within these countries themselves Studies on the impact of UMP during the GFC on the United States itself as mentioned (Anzuini & Rossi, 2022; Bauer & Rudebusch, 2014; Breitenlechner et al., 2021; Chebbi, 2018; Eksi & Tas, 2017; Gagnon et al., 2018; Gagnon et al., 2011b; Gürkaynak et al., 2019; Jawadi et al., 2017; Meinusch & Tillmann, 2016; Swanson, 2021; Thornton, 2017) In addition, the number of studies focusing on assessing the effects of UMP on developed countries or areas using UMP like

Although this field only focuses on AEs, there are many approaches to analyze the whole effect of UMP Most of the studies currently focus the analysis on the influence of these policies on financial markets such as (Altavilla et al., 2021; Ambler & Rumler, 2019; Bauer & Rudebusch, 2014; Eser & Schwaab, 2016; Fassas & Papadamou, 2018; Fendel & Neugebauer, 2020; Gagnon et al., 2011a; Haitsma et al., 2016; Hosono & Isobe, 2014; Krishnamurthy & Vissing-Jorgensen, 2011; Ricci, 2015; Safar et al., 2020; Swanson, 2021; Thornton, 2017); and real economies (Alessi & Kerssenfischer, 2019; Aòhoff et al., 2021;

Burriel & Galesi, 2018; Evgenidis & Papadamou, 2021; Rossi, 2022); separately or both of them simultaneously (Aùt-Sahalia et al., 2012; Breitenlechner et al., 2021; Eksi & Tas, 2017; Evgenidis & Papadamou, 2021; Horváth & Voslarova, 2017; Kapetanios et al., 2012; Saiki

In general, the empirical results of studies discussed above indicated that; firstly, the implementation of UMP in AEs leads to an increase in the total assets of central banks resulting in a rise in output and price level and those effects are extremely strong for economic activities; secondly, the financial markets are affected significantly by the UMP shocks, proved by the raising of stock price, lowering long-term government bond yields and the depreciation of the local exchange rate Moreover, there are several studies analyzing the effect of UMP on asset price in AEs (Apergis et al., 2020; Gagnon et al., 2018; Gagnon et al., 2011b; Haitsma et al., 2016; Neely, 2015; Saiki & Frost, 2014) and the findings emphasized that the conduct of unconventional regime gives a strong boost to asset prices in these countries There is a lot of evidence for this situation when the stock index responds strongly to a surprise of UMP in particular periods, including pre-or post-GFC in 2008, it also occurred similarly but to a lesser extent when it comes to housing prices Moreover, few studies proposed the relationship between UMP and bank performance (Mamatzakis &

Bermpei, 2016) its impact on the expectation and sentiment of investors (Galariotis et al., 2018; Lutz, 2015), or the role of risk aversion (Fassas & Papadamou, 2018), however, these studies are not enough remarkable, and they are not also insignificant in number

The second strand of this research topic is the international spillover effects of AEs’ UMP on the rest of the world, focusing on developing countries or emerging market economies (EMEs) Several empirical studies have been conducted to explore the economic reaction to the UMP shock in AEs, with a particular focus on EMEs such as (Canzoneri et al., 2021; Dées & Galesi, 2021; Fratzscher et al., 2018; Kiendrebeogo, 2016; Rosa, 2011) In addition to looking at the influence of the US’s UMP policy, the studies focus on the UPM policy of the UK, Japan, and ECB on EMEs such as (Andreou et al., 2022; Apostolou & Beirne, 2019; Banerjee & Goyal, 2020; Walerych & Wesołowski, 2021) Besides examining the impact of UMP on EMEs, many studies focus on developing countries or different regions such as Latin America, Asia, Gulf countries, and BRICS such as: (Andreou et al., 2022; Assoumou-Ella et al., 2022; Carrera & Ramírez-Rondán, 2020; Dées & Galesi, 2021; Galloppo & Paimanova, 2017; Inoue & Okimoto, 2022; Kiendrebeogo, 2016; Kim & Yang, 2011; Lee et al., 2020; Lubys & Panda, 2021; Miyajima et al., 2014; Rafiq, 2015; Sugimoto

& Matsuki, 2019; Tran & Pham, 2020; Xu & La, 2017; Yang & Hamori, 2014) Few studies have studied the impact of UMP policies of developed countries on a particular country such as (Chen & Tsang, 2020; Ijiri & Jinushi, 2021; Janus, 2020; Kabundi et al., 2020; Lakdawala,

In general, the studies listed above mainly concentrated on financial markets and the real economy in these nations, and these findings show that the expansion of AEs' UMP had a considerable influence on the rest of the world, particularly EMEs They showed evidence of international spillovers UMP can lead to a growth in portfolio flows accompanied by an increase in real production and a variety of movements in financial variables, such as reduced bond rates, an increase in the stock market, or the appreciation of the local exchange rate However, not all research provides the same results Some studies explored the change in return of real estate (Gupta & Marfatia, 2018) and the findings also prove that UMP has a positive impact in the short-run on EME; Other research suggested that one of the typical UMP instruments in AEs, like as quantitative easing, had a considerable impact on capital flows (Alper et al., 2020; Kiendrebeogo, 2016; Tillmann, 2016) indicated that these policies in AEs boost capital flows to EMEs and developing nations and that the introduction of UMP led to a considerable rise in portfolio flows, cross-border credit flows, and so on in these countries A few studies have studied the impact of UMP on other objects such as the performance of global mutual funds (Cenedese & Elard, 2021), capital structure and firm performance (Gürkaynak et al., 2019), operational health of banks (Acharya et al., 2019)

The other consideration in this field is analyzing the effect of UMP in a more specific scope is focused on the Asia and Pacific region, but several studies are quietly limited, they paid less attention to this area despite Asia being one of the markets that have a key role for international investors and industrialized countries Some studies on UMP impact on countries in Asia (Tran & Pham, 2020), investigate the spillover effect of the US’s UMP on the Asian developing nations (including China, India, Indonesia, Malaysia, South Korea, Thailand, the Philippines, and Vietnam), Lee et al (2020) research about the effects of US’s UMP On Asian Stock Markets (including China, Hong Kong, Indonesia, Japan, Malaysia, The Philippines, Singapore, South Korea, and Thailand (Rafiq, 2015) explores the effect of the US’s quantitative easing on a group of countries in Asia (including Viet Nam) They discovered that the spillover impact was likely to be minor and that the source of this disparity may be a group of Asian frontier economies The study of (Sugimoto & Matsuki, 2019; Xu

& La, 2017) also considers the impact of US UPM policy on the financial markets of Asian countries, focusing on countries such as Singapore, South Korea, and Hong Kong Although there are few studies in this field, empirical data show that nations in Asia and the Pacific region have considerable responses to the shock of UMP in AEs, particularly the US, in terms of economic activity and financial variables First, the large-scale growth of UMP in AEs pushed capital inflows to this area, leading to an increase in the stock market and the appreciation of local currencies; Second, it had a favorable influence on these nations' actual production Some research, however, appears to be different, showing evidence of this impact to a lesser amount

More specifically, the study will delve into several studies for Asian countries Rafiq

(2015) investigates the impact of the United States' quantitative easing on a group of Asian countries The reason for this disparity may be due to the group of Asian countries belonging to the region's frontier economy Lee et al (2020) evaluated the impact of quantitative easing (QE) on return and volatility in selected Asian markets from the US market They found that the United States QE policies have had a significant influence on the correlations between the United States and various Asian countries, with a significant progressive drop in correlations during the most recent QE, and increased stock market liquidity boosts financial spillovers dramatically Tran and Pham (2020) analyze the monthly responses of Asian emerging market equity prices, long-term interest rates, and currency rates to the UMP in the United States The first finding is that UMP shocks from the United States are associated with a rise in stock prices, a fall in long-term interest rates, and currency appreciation in Asian developing countries In contrast, traditional US monetary policy shocks have a detrimental impact on these recipient countries These empirical findings suggest that policymakers in Asian developing countries should be concerned about the potential spillover effects of the US’s UMP if it is adopted

The final strand of this research topic is the research on UMP during crises, especially during pandemic crisis cause by COVID-19 Because the crisis is the beginning point for implementing these reforms However, many of the papers given tended to highlight worries about the GFC while overlooking the fact that a pandemic crisis created by COVID-19 is presently in place Indeed, they paid little attention to examining the different effects of the US's UMP on other countries during two different crises: the GFC period and the pandemic crisis, even though COVID-19 is one of the most important factors influencing monetary policy in AEs and the greatest threat to the global economy Most studies investigated the impacts of UMP during the COVID-19 pandemic such as (Benigno et al., 2022; Nozawa & Qiu, 2021; Rao & Kumar, 2023; Uz Akdogan, 2023) research on the impact of UMP on the financial market during covid 19, focusing on bond yield (government, corporate) exchange rate and stock return in the country where UMP is implemented A few studies on the impact of UMP on the financial market and real economy such as (Feldkircher et al., 2021) Ngô and Nguyễn (2020) refer to the application of unconventional monetary policy and analyze the actual application of UMP in countries around the world and Vietnam during the crisis, especially, the COVID-19 pandemic Additionally, Nguyễn and Ngô (2021) also indicate that a shock in the balance sheet of the Federal Reserve has a strong impact on Vietnam through two main channels: the portfolio rebalancing channel and the asset price channel In particular, a few studies have compared the difference in the impact of UMP in the two periods GFC and COVID-19 pandemic such as (Putniņš, 2022; Rahman & Serletis, 2023)

In addition, research on UMP policy in developed countries (US, UK) to other markets in both GFC and COVID-19 periods is still limited, these studies focus mainly on financial markets Ntshangase et al (2023) Analyze the impact of the US’s UMP on inflation and non- inflation targeted developing markets from 2000Q1 to 2020Q4 following the credit crisis and during COVID-19 The result shows that for both inflation-targeting and non-inflation- targeting developing nations, the US’s UMP causes a spike in the exchange rate and a decline in the central bank policy rate The share prices, however, were not significantly impacted Except for the reaction of equity prices, the empirical results are statistically significant, reliable, and comparable with other investigations The study of Cortes et al (2022) only claimed that the results of the COVID-19 interventions for the identical AEs and EMEs groups indicate a favorable spillover of Fed policy for both countries The Fed's policy announcements during COVID-19 significantly affected EMEs' short-term maturities Furthermore, when focused on specific country stock markets, the analysis discovered particularly favorable disaster-risk spillovers that are predominantly concentrated in Asia (e.g., South Korea, Taiwan, and Malaysia) Rebucci et al (2022) looked at the consequences of UMP during the COVID-19 outbreak-related worldwide financial upheaval They discovered that, as compared to prior interventions made during the GFC, the effect of QE announcements during this crisis on EMEs was much stronger, even though they solely focused the study on government bond yields and bilateral US dollar exchange rates In conclusion, several research studies have found that EMEs are more responsive to large-scale interventions (the COVID-19 QE announcements), whether domestic or foreign in origin

Although several papers have studied the impact of UMP in advanced economies or emerging market economies, they have overlooked the impact of UMP on frontier markets These markets are also instrumental in the transmission of capital flows among countries related to international investors Furthermore, there are few studies that explore the cross- border impact of UMPs on the real economy and financial markets of frontier markets in Asia The number of countries included as a research sample for Asia is still quite limited, and the impact of the US’s UMP on this region has not been comprehensively assessed The emergence of marginal economies along with emerging markets is also an issue that should be studied in this area to more fully assess the impact of non-standard monetary policies in AEs, especially the US and EU Currently, Vietnam’s stock portfolio in the marginal market portfolio accounts for the largest share, and its level of globalization integration is increasing Because the Vietnamese market is a small, open economy that is highly integrated with the

US and the global economy, it is vulnerable to external shocks and financial contagion Therefore, it is essential to study the impact of major changes in the monetary policy of developed countries, especially the United States, on the Vietnamese economy and financial market

The methodologies review

When addressing the analysis of the impact of UMP, it is pertinent to delve into the methodologies employed The empirical literature delineates two primary approaches, each about distinct fields that are currently of concern: (i) event study method, and (ii) vector autoregressive model approach (VAR model approach)

The analysis of monetary policy for researchers and policymakers has been supported by the vector autoregression approach platform introduced by Sims (1980) VAR models are the most widely used approach for studying the consequences of conventional monetary policy The literature is unanimous about the impact of monetary policy on output or inflation In other words, VAR-based models are used to assess impacts on lower frequency variables such as output and inflation, which are often of primary concern to central banks Another advantage of employing VAR models to estimate the impact of unconventional monetary policy is that they may be readily linked to current monetary policy research Nowadays, analyzing the domestic effect of UMP on AEs is even more important when using this model, as a result, many studies up to now have used standard VAR to deal with this situation (Breitenlechner et al., 2021; Dahlhaus & Vasishtha, 2014; Gambacorta et al., 2014; Horváth & Voslarova, 2017; Inoue & Rossi, 2019; Inoue & Okimoto, 2022; Mukherjee & Bhaduri, 2015; Saiki & Frost, 2014; Sugimoto & Matsuki, 2019) The international impact of UMP on other countries is also usually analyzed by applying VAR models (Anaya et al., 2017; Bowman et al., 2015; Sugimoto & Matsuki, 2019)

There is no denying the advantages of the VAR model in studying issues related to monetary policy; however, it also has some disadvantages The greatest flaw in VAR is that it does not distinguish between independent and dependent structural shocks when assessing how variables respond to independent structural shocks As a result, Bernanke et al (2004) suggested using a structural VAR model to address the issue because the impulse response function and variance decomposition for the studied variables might not be correct in the VAR model

According to Neely (2015) to evaluate the effects of the UMP, one must examine asset price changes as announcements or other news change market expectations Event studies investigate whether the disclosure of information concerning UMP measures alters financial market expectations, resulting in changes in financial market variables Meanwhile, UMPs are often expressed in the form of speeches or announcements such as forward guidance or

QE (Unlike CMP, conducted via interest rates) These policies, once officially announced, will be considered the event date and the researchers will consider the fluctuations of factors in the financial market such as stock prices, bond interest rates, and exchange rates around the event date to assess the impact of this event on those factors In other ways, these policies are often modeled as binary indicators or dummy variables in event study regression but for other models, such as the VAR model, it is difficult to do (Meinusch & Tillmann, 2016) Therefore, event study dominates as an effective method, especially when they have concentrated on the effect of UMP on AEs themselves and on financial markets which have quick and strong responses with the adjustment of monetary policy

Event studies are effective tools for evaluating the effects of UMP even though they are straightforward and intuitive because (i) news about monetary policy will likely dominate other non-monetary news during the announcement window given the high frequency of the data and the relatively small event window; (ii) given that the stock market reacts quickly to news, it is conceivable that it would accurately represent the monetary policy shocks within the event window However, if monetary policy news cannot outweigh other shocks inside the event window or if the stock market responds slowly to monetary policy surprises, an event study is unsuitable This method allows the analysis of the effect of official announcements or speeches by the central bank related to UMP on the variables concerned

Studies using ESM to examine the effects of UMP focus on two groups: the effects on the financial market of those countries themselves and the effects on the rest of the world

In the scope of this study, by ESM method to study the influence of the US’s UMP on other countries can be mentioned as follows (Cortes et al., 2022; Falagiarda et al., 2015; Galloppo

& Paimanova, 2017; Glick & Leduc, 2012; Lubys & Panda, 2021; Mishra et al., 2014; Neely, 2015; Rosa, 2011, 2012; Ruiz, 2015) ESM used in these studies varied However, it is all based on the identification of unusual fluctuations around events related to the use of UMP tools such as the announcement of LASP, forward guidance, and sometimes the statement of the head of the Fed This method focuses on factors in financial markets such as the exchange rate between the USD and other currencies, the change in the yield of different types of bonds (government, corporate, and foreign bonds with various maturities…), or the difference in interest rates gaps between bonds of other maturities, and the rate of return of a stock index or individual stocks Depending on the type of asset studied, the ESM approach will use different methods to identify and analyze unusual fluctuations related to the yield or price of the asset Studies can focus on many different asset classes simultaneously, such as those of (Falagiarda et al., 2015; Glick & Leduc, 2012; Mishra et al., 2014; Neely, 2015; Rosa, 2011,

2012) In particular, the use of ESM to extend to many different sectors before different macro events has been suggested and carried out by the research of (Galloppo & Paimanova, 2017; Lubys & Panda, 2021) The above studies mostly use daily data, and a few use intraday data such as (Rosa, 2012) Overviews of ESM research methods are presented in Table 2.3

However, although it is significantly useful in applying the event study method, evidence shows that it also has several limitations Firstly, variables expressing UMP like

QE or forward guidance are likely to be endogenous and they cannot easily be modeled as dummy variables (Meinusch & Tillmann, 2016) Besides, the effect of UMP shock on other variables cannot be observed through the impulse response functions which are calculated in all VAR-based models Secondly, because event study often uses high-frequency data (daily, intra-daily), the study is limited to the impacts on variables with the same frequency, particularly financial market indicators such as interest rates, the yield curve, or asset prices While variables with lags before other policies, such as GDP and inflation, this method cannot assess the impact Therefore, an event study should only be used to evaluate the impact of a specific event, piece of news, or announcement on a company or stock or financial factors such as interest rate, bond yield, etc

In the scope of this study, the author focuses on using the ESM to study the impact of the US’s UMP on stocks on the Vietnamese stock market during the period of the GFC and the COVID-19 pandemic To analyze the influence of the US's IMP on sectors, study the use of ESM according to the approaches of (Galloppo & Paimanova, 2017; Lubys & Panda,

2021) These are the two periods in which the US implemented the UMP policy to support the economy, this also created spillover effects to other countries including Vietnam

Table 2.3: Studies using the ESM relate to the US’s UMP policy announcements impacting financial markets

UK EU government bonds, stocks price GFC

Panda (2021) ESM US, EU BRICS

Stock price sectors of interest: consumer, financials, and materials

JP BRICS The stock price of eleven sectors GFC

UK and BoJ macroeconomic; financial sector and Libor–OIS spread

Australia, Canada, Germany, Japan, UK bond yields, long-term interest rates, U.S TIPS- implied inflation expectations, daily exchange rates, and equity index

Czech Republic, Hungary, Poland, and Romania

Exchange rate; Stock market index; Interbank rate;

(2014) ESM US EMEs (21 countries) exchange rates, government bond yields, and stock prices

US US Asset Prices (Bond;

Canada, Australia, Japan, and the EU interest rates; exchange rates; commodity prices;

Stock returns, interest rates, and exchange rates GFC Gagnon et al

(2011) ESM US US Interest Rate Changes

EMEs Bonds yields; Equity price, exchange rates GFC

ESM US US interest rate data on money-market futures, overnight index swaps (OIS), and Treasury securities

Suchanek (2014) ESM US EMEs Bonds yields; Equity price, exchange rates GFC

(2011a) ESM US US interest rate, CPI, unemployment GFC

(2011b) ESM US US Interest Rate GFC

(2022) ESM EU EU Bond (gov, bank, corporate)

(2021) ESM US US credit spreads COVID-

Source: Compiled by the author 2.3.2.2 Vector autoregressive model approach

With all the pros and cons of the event study method discussed above, several papers have already found another model that can overcome several disadvantages The two main drawbacks of event studies are heavy assumptions about the identification of monetary policy shocks and the focus on a very short period In this regard, the standard event study methodology does not provide an estimate of the persistence of a monetary policy shock (Wright, 2012)

Some studies applied the Qual VAR model as a more efficient way to combine a standard VAR technique with the policy announcements modeled as a binary variable in event studies literature (Chebbi, 2018; Galariotis et al., 2018) A Qual VAR addresses the gap between the conventional VAR literature of policy shocks and UMP actions However, Qual VARalso has a major drawback that, if chosen to use, needs to be seriously considered for its correctness It is impossible to determine whether the Qual VAR results are reliable because the setting for latent variables significantly influences the quality of the latent variable identification Thus, despite being a useful instrument for forecasting, using the Qual VAR for economic analysis is not recommended (El-Shagi & Von Schweinitz, 2016)

On the other hand, Sims (1980) introduced a vector autoregression method platform to aid in the examination of monetary policy for scholars and policymakers VAR models are the most widely used approach for studying the consequences of traditional monetary policy The literature is unanimous on the impact of monetary policy on output or inflation In other words, VAR-based models are used to assess impacts on lower frequency variables such as output and inflation, which are often of primary concern to central banks Another advantage of employing VAR models to estimate the impact of unconventional monetary policy is that they may be readily linked to current monetary policy research Nowadays, analyzing the domestic effect of UMP on AEs is even more important when using this model, as a result, many studies up to now have used standard VAR to deal with this situation (Breitenlechner et al., 2021; Dahlhaus & Vasishtha, 2014; Gambacorta et al., 2014; Horváth & Voslarova, 2017; Inoue & Rossi, 2019; Inoue & Okimoto, 2022; Mukherjee & Bhaduri, 2015; Saiki & Frost, 2014; Sugimoto & Matsuki, 2019) The international impact of UMP on other countries is also usually analyzed by applying VAR models (Anaya et al., 2017; Bowman et al., 2015; Sugimoto & Matsuki, 2019) There is no denying the advantages of the VAR model in studying issues related to monetary policy; however, it also has some disadvantages When examining how variables respond to independent structural shocks, VAR makes no distinction between independent and dependent structural shocks As a result, Bernanke et al (2004) proposed utilizing a structural VAR model to address the problem because the VAR model's impulse response function and variance decomposition for the researched variables could be incorrect

Research gap identification

Firstly, to the best of my knowledge up to now, literature pay little attention to frontier markets although it also has a key role in the investment of international investors According to Orhan et al (2016) since frontier markets are at their early stages of growth and capitalization they can provide convenient investment opportunities Meanwhile, according to Uludag and Ezzat (2016), frontier markets are at the end of the permissible investment horizon, beyond which markets are unsuitable for investment As a result, investing in frontier markets is fraught with constant hazards and obstacles, making navigating such markets equivalent to walking through a minefield However, the prospect of high returns and future expansion makes frontier countries even more appealing to foreign investors Therefore, frontier markets might appear to be an interesting alternative for foreign investors because of the appearance of good signals in the financial market and the prospects of higher profits being generated from this market Despite its good potential, research on such markets is limited, especially when it comes to the effects of unconventional monetary policy of AEs on the financial market or real economy in a particular country or region To fill this gap, this study focuses the analysis on Vietnam which is a small open and frontier market economy transmitted to the market economy since the 1980’s The Vietnamese stocks market account for the highest proportion in the portfolio of frontier market indexes Among Asian countries, Vietnam may now exhibit similar traits to developing, open nations with an insufficient institutional structure and a developing equity market which should be considered by policymakers and foreign investors

Secondly, most studies focus on the global financial crisis and examine the impact of unconventional monetary policy during this period without considering or paying little attention to the epidemic crisis occurring on a large scale over the world from 2020 to the present If so, these studies only look at the individual impact of the COVID-19 epidemic on the stock market or specific sector but do not compare or consider these two major crises in the same analysis despite that over the past decade they have been the biggest crises with global impact The study might fill this gap by analyzing the phase from 2007 to 2022 The period of 16 years in case of international effect because this period will cover enough different stress market states in international economic conditions such as GFC (2008-2009), the change into policy normalization in the US (2014-2017), a slight difference in monetary policies in AEs during uncertain economic conditions (2018-2019) and the global pandemic crisis since the COVID-19 appeared at the end of 2019 until present, it will most fully reflect the stages of US use of UMP and the impact of those policies on Vietnam Studying two crises with large differences (financial crisis and health crisis) helps to better understand the positive impacts of the US’s UMP on Vietnamese financial market and real economy From there, the research results can provide policy implications that have practical value for Vietnam

Finally, despite the extensive literature on the spillover effects of the US’s UMP on emerging and developing economies, there is a lack of empirical evidence on how these effects vary across different time horizons and transmission channels There is a gap in understanding how the US’s UMP affects the financial markets and the real economy of Vietnam, a frontier financial market and an open, small economy This research aims to fill this gap by studying the international effect of the US’s UMP on Vietnam in two steps First, it examines the immediate impact of these policies on the financial markets of Vietnam using event study techniques, which can capture the short-term reactions of asset prices and exchange rates to official US’s UMP announcements Second, it assesses the longer-lasting impact using a SVAR model, which can capture the dynamic interactions of macro-financial variables across countries This analysis could help us better understand the cross-border spillovers of the US’s UMP on Vietnam and the implications for monetary policy coordination

In summary, this study aims to contribute important empirical evidence on the impact of US’s UMP on Vietnam, a country experiencing increasing economic globalization Additionally, the current Vietnamese stock market holds the largest share within the group of frontier markets in MSCI indices, presenting significant potential for high returns to investors The research provides an overall perspective on the impact of unconventional monetary policies from the United States on Vietnam, especially when US’s UMP is transmitted through international channels, affecting Vietnam's GDP and inflation Finally, the study compares the differences in the effects of US’s UMP on Vietnam during the global financial crisis and the recent COVID-19 pandemic These contributions are both substantial and significant for the research field

In Chapter 2, the research provides a detailed presentation of the relevant theoretical framework, which includes the Efficient Market Hypothesis, Taylor's Rule, Asset pricing by discounted cash flow model, Milton Friedman's money demand theory, Tobin's q theory, and the Mundell-Fleming-Dornbusch model The study analyzes the interconnections of these theories with the research problem Furthermore, the theories related to monetary policy, both conventional and unconventional, are also elaborated on, covering the tools, transmission mechanisms, and the distinctions between the two policies

In this chapter, the research conducts a comprehensive review of studies related to the impact of UMP policy on financial markets and the economy, both domestically and in terms of its spillover to other countries The literature review process focuses on two aspects: (i) the scope of the research and (ii) the research methods Finally, the study identifies gaps in previous research, thereby highlighting new focal points for this research.

RESEARCH METHODOLOGY

Event study method

3.1.1.1 Introduction to event study method

In finance theory, companies' stock prices stand for all information accessible about those companies in the capital markets According to MacKinlay (1997), economists are regularly asked to quantify the consequences of an economic event on business value On the surface, this is a challenging assignment However, the event study method may readily develop a measure Given this fundamental principle, one can measure the event's influence on the firm's stock by measuring how a specific event alters a firm's prospects

ESM allows researchers to analyze how the price of an individual stock, or a portfolio, responds to the announcement of an event According to Cheng and Sun (2013) and Galloppo and Paimanova (2017), ESM can be conducted to investigate the stock market response to policy announcements By examining the price changes before and after the event, researchers can estimate the event's impact on the stock price and the market's perception of the event This can provide valuable insights for investors, regulators, and policymakers who must understand how markets react to specific events

The economic impact of an event is measured in return for what is known as an abnormal return The calculation of abnormal returns involves subtraction from the actual returns on the stocks of the returns that would have been achieved if the examined event had not occurred (expected returns) The typical returns must be approximated, even though the actual returns may be objectively seen Expected return models, widely utilized in other fields of finance research, are used for this purpose in the event study method The use of ESM is not only limited to AR and CAR for individual stocks but has been extended to research different sectors (Galloppo & Paimanova, 2017; Lubys & Panda, 2021) Studying the influence of other sectors will help further analyze the industry's reaction to macro announcements, including monetary policy

According to Kaspereit (2021), all studies that appeared between 2009 to 2018, the total number of publications included in the analysis is 180, with 55 appearing in the Journal of Accounting Research (17.5% of all articles published in this journal during that period),

3 CHAPTER 3: RESEARCH METHODOLOGY AND DATA

71 in the Journal of Finance (10.1%), and 54 in Management Science (3.0%) As a result, the event-study design may be regarded as one of the most famous research methodologies in the disciplines of journals

3.1.1.2 The steps of event study method

The process of conducting the research by the ESM will be carried out in these steps:

Step 1: Identify the research event

For ESM, the first step is to determine or research events Benninga (2014) suggests that an event is characterized as a moment when a business makes an announcement, or a significant market event occurs These events' landmarks are essential for studying and determining the data needed for collection

Within the scope of this research, research events are press releases and Fed announcements related to the use, expansion, or extended using of UMP tools in the GFC period and the COVID-19 pandemic period

Step 2: Determine the length of time for the event windows

According to Campbell et al (1997), after the first step in conducting an ESM is to define the event of interest, the second step determines the period during which the securities prices of the enterprises engaged in the event will be analyzed - the event window It is common practice to set the event window to be greater than the period of interest In other words, there is no time duration standard in the event study method for the length of time for the estimation window, event window, and post-event window frames Daily return data is popular as a standard in event research because of its accuracy and limited bias in results (Corrado, 2011)

Figure 3.1: Time lengths for window frames used in the event study method

Source: MacKinlay (1997) The estimation window (sometimes called the control period) determines the expected behavior of the stock market factors El Ghoul et al (2023) showed that the estimation window measures all the parameters needed to estimate normal returns (the returns one would expect to have had if the event had not occurred) Differentiation between the estimation and event windows is critical for measuring the normal returns correctly According to Benninga (2014), the estimated window typically lasts 252 trading days (or one calendar year) However, this number of days may not always be present in the sample

If not, you must decide if the quantity of observations you do have is enough to generate reliable conclusions Similarly, Corrado (2011) suggested that 250 days is chosen to match the number of trade days in a year roughly This study selects 250 days for the estimation window

The event window is frequently extended to multiple days, including at least the day of the announcement and the day after This is done to capture the price effects of announcements made after the stock market closes on the day of the announcement The period preceding or after the occurrence may also be essential and should be considered individually in the study Ferreira and Serra (2022) showed that if it is too long, it can be affected by disclosing other significant information, such as macroeconomic statistics If it is too limited, asset prices could not have enough time to integrate changed expectations appropriately

According to Lubys and Panda (2021), the cumulative abnormal returns are calculated in the following event window: 1 day before the announcement to capture the anticipation in the markets and two days after the event, which should capture the initial reaction (- 1; + 2) Galloppo and Paimanova (2017) suggested that the variable is the cumulative abnormal return, calculated in the following three event windows: (1) a one-day window (0; 0), i.e., the day of the announcement; (2) a two-day window (-1, 0), i.e., from day before the announcement and the announcement day (this case, we try to capture an anticipatory effect of announcement); and (3) five-day window (-1; +3), i.e from day -1 to day +3 of policy announcement Aùt-Sahalia et al (2012) used a five-day window, confirming the validity of results for alternative, smaller windows up to a minimum length of one day We also consider alternative reference time an imperfect substitute for increasing the study frequency Ricci

(2015) focused on the following short event windows: 5-day (-1;+3), 3-day (-1;+1), and one- day (0;0) Võ and Đặng (2018) showed that the event window to consider market reactions is 11 days (5 days before and after the event) Based on the studies, this research will choose a maximum event window of 11 days, encompassing five days before and five days after the event date

Step 3: Determine AR and CAR (or AAR and CAAR)

Determine expected return or normal return

There are several different financial models can be used to estimate the expected return of a stock

The mean-adjusted model calculates the stock's projected return based on the stock's historical average return over a certain period, adjusted for changes in market circumstances or the company's financial performance This model implies that the stock's future returns will be comparable to its past returns, with modifications for market or company-specific changes This model's formula is:

𝐸(𝑅 𝑖,𝑡 ) : is the expected return on stock i at time t

𝑅̅ 𝑖 : The average return of stocks i in the period of the estimate window

This model adjusts for market sensitivity As a result, it is adequate for occurrences that coincide with significant market changes For this method, the expected return is the same-day market return Thus, all equities have a level of return that anticipates the exact expectations, and there is no need to consider the estimation window

Rm,t : is the return on an appropriate market index at time t

❖ The market and risk-adjusted model or the market model

Structural vector autoregressive model

3.1.2.1 introduction to structural vector autoregressive model

SVAR is a multivariate, linear representation of a vector of observables on its lags Economists use SVAR to recover economic shocks from observables by enforcing a strict set of minimal assumptions acceptable to a broad range of models Besides, SVAR has long been considered the workshop in empirical macroeconomics to study the expected response of the model variables to a given one-time structural shock such as policy actions or unexpected changes in the economy (Kilian, 2013) The essence of SVAR is obtaining structural parameters and shocks based on observing the reduced form VAR developed by Sims (1980) SVAR allows for as many types of shocks as time series variables in the set by assuming that observable variables are endogenous In contrast, shocks are the impulses that move the system

The benchmark SVAR model has the following representation:

Equivalently, the model can be expressed in a more compact form such that:

Where 𝑌 𝑡 is a (n x 1) vector of n endogenous variables; 𝛤(𝐿) is a matrix-valued polynomial in a positive power of the lag operator L; and 𝜇t is a (n x 1) vector of structural error terms; ct is a (n x 1) vector of exogenous variables The variance-covariance matrix of the structural error term is typically normalized such that: 𝑬(𝝁 𝒕 𝝁 𝒕 ′ ) ≡ 𝜴 𝝁 = 𝑰 𝑲

We can estimate a reduced form equation (VAR) by multiplying equation (1) with inverse matrix 𝜞 (𝜞 -1 ), the equation is written below:

𝜞 𝟎 −𝟏 𝜞 𝟎 (𝑳)𝒀 𝒕 = 𝜞 𝟎 −𝟏 𝒖 𝒕 (3.10) This can be written as:

𝑨(𝑳)𝒀 𝒕 = 𝜺 𝒕 (𝟑 𝟏𝟏) where 𝐴𝐿 = 𝐼 − 𝐴 1 𝐿 − 𝐴 2 𝐿 2 − ⋯ − 𝐴 𝑝 𝐿 𝑝 denotes the autoregressive lag order polynomial; the reduced-form innovations are in general a weighted average structural shock 𝜇t such that: 𝜀 𝑡 = 𝛤 0 −1 𝑢 𝑡 and hence the variance of 𝜀 𝑡 is:

SVAR has been proven in the VAR literature to capture better the key features of small open economies than standard identification approaches

The detailed research procedures to estimate the SVAR model are presented as follows:

The model is proposed based on economic theories and literature reviews to test the research hypothesis

• Step 2: Check the unit root for data series

The stationarity of the data series will reflect the order of the data series included in the SVAR model Make sure all data series in the model are stationary, if not, regression analysis with such series can lead to spurious regression If there are non-stationary data series, the study will deal with the non-stationarity of the data series by taking the difference for them

• Step 3: The optimal lag-length selection for the SVAR model

The research will conduct the optimal lagging order test with the variables in the VAR model The model's variables are all stationary or have been processed to be stationary in step 2 The Vector Autoregressive Lag Length Selection Criteria selects the ideal number of lags In this study, the lag for the model will be chosen based on the Akaike information criterion (AIC), the Schwarz Criterion (SC), and the Hannan- Quinn Criterion (HQ)

• Step 4: Estimating a reduced VAR model with optimal lag length

The study will perform a regression of the reduced VAR model for the variables with the optimal lag in step 3 In the case of multiple lags selected according to the criteria, the study will regress each VAR model with each optimal lag to choose the most suitable model for the research data sample and the reality of previous studies

• Step 5: Diagnostic testing of the VAR model

The study carried out hypothesis tests after model regression, such as testing the model's stability, residual autocorrelation, and the normal distribution of residuals The researchers will choose other VAR models to ensure that the model satisfies the model's assumptions and meets the fit criteria if these hypothesis tests are unsuccessful

• Step 6: Estimate the SVAR from the just estimated VAR result

The study conducted a regression of the SVAR model with the constraints matrix established according to the research's argument about the relationship between the variables in the model based on the most appropriate reduced VAR model

• Step 7: Analyzing the impulse response function (IRF) and the Forecast Error Variance Decomposition

The study examines each variable's current and future response in the SVAR model under the shock of one variable by the impulse response function Then, the study also analyzes the variation of one variable in the model, mainly caused by shock via the decomposition of variance

• Step 8: Estimate the SVAR with two periods separately

The study conducted a regression of the SVAR model with the constraints matrix like step 6 dividing the data into two separate periods: the GFC and during the pandemic crisis in which exogenous shock - the COVID-19 pandemic which is proxied by the number of monthly new confirmed cases of COVID-19 is added in model to clarify the phase of the pandemic

• Step 9: Analyzing the impulse response function (IRF) and the Forecast Error Variance Decomposition in two phases

The impulse response function and variance decomposition will be conducted in step

7 to compare the differences between the two periods

The SVAR model is used in this study to examine the effects of US UMP shocks on Vietnam's real economy based on the approach (Carrera & Ramírez-Rondán, 2020; Cushman

& Zha, 1997; Li et al., 2010; Yildirim & Ivrendi, 2021)

The model's variable selection and ordering is based on the worldwide transmission mechanism of the US’s UMP and Yildirim and Ivrendi (2021) research, in which the risk- taking channel and portfolio rebalancing channel serve as the main guiding concept for the selection of transmission channel variables This research develops a benchmark model to explain how changes in the US’s UMP were transferred to Vietnam in the short term via monetary transmission channels This study used a seven-variable SVAR model with an indicator of the US’s UMP and variables about domestic issues to assess the possible consequences of the US’s UMP It is divided into two categories as follows:

• Group 1: The indicator of the US’s UMP and international transmission channels to Vietnam

• Group 2: Domestic variable: this group will exhibit five indicators from the Vietnamese economy, including an index of equity prices, a measure of market interest rate, a nominal bilateral exchange rate, and a measure of real economy such as output and inflation

The vector of endogenous variables is as follows:

In which UMP (a proxy for the US’s UMP), VIX (the VIX index), CF (capital inflows to Vietnam), SP (stock price), IRR (interest rate), FOREX (exchange rate), GDP (gross domestic product), and CPI (inflation) are all present This work presents a short-term limit on contemporaneous structural factors based on the Cholesky decomposition, allowing acceptable economic structures to be produced This study will also derive the impulse response functions and variance decomposition from SVAR by assuming sequential effects This model assumes that the United States' UMP significantly impacts macro-financial circumstances in Vietnam In contrast, the impact of local economic conditions on global conditions is insignificant The matrix of short-term restrictions on the equation has the following representation:

UMP t VIX t CF t SP t IRR t FOREX t GDP t CPI t

UMP t VIX t CF t SP t IRR t FOREX t GDP t CPI t e e e e e e e e

Equations arising from these restrictions can be presented as follows:

Overall, the matrix above summarizes the identification strategy For example, the study assumes that the US’s UMP impacts capital flows in Vietnam contemporaneously The capital flows, as well as other macroeconomic factors However, it has no immediate influence on the UMP in the United States This assumption places a concurrent zero restriction on the US block (a 12 =a 13 = = a 18 =0), which is frequently utilized in the SVAR- based literature (see, e.g., (Anaya et al., 2017; Yildirim & Ivrendi, 2021))

3.1.2.4 Research variables a Proxy variable for the US’s unconventional monetary policy

Although early studies used event study analysis to concentrate on the UMP announcement impacts, especially using QE announcements and operations, concentrating on international spillover effects on the rest of the world with time lag needs other suitable measures Recent studies evaluated the impacts of the US’s UMP by using the Fed's balance sheet and interest rate spreads as a measure for the UMP instruments (Anaya et al., 2017; Buch et al., 2019; Gambacorta et al., 2014) In November 2008, when the Federal Fund Rate hit the zero lower bound, and Fed declared QE, the Fed effectively transitioned its monetary policy variable from the Federal funds rate to the size of its balance sheet (Belke & Klose,

2013) In contrast to the pre-crisis era, assessing monetary policy by looking at a single interest rate is no longer possible In general, interest rates were replaced as the primary tool for policymaking by central bank balance sheets (Gambacorta et al., 2014) In line with the recent literature, the US’s UMP is proxied by total assets Fed’s balance sheets in this study b Proxy variables for the transmission channel

RESEARCH DATA

Data for ESM

(i) Event dates related to the US’s UMP announcements during the GFC and the COVID-

19 pandemic These data are collected directly from the Fed's website and research by (Bowman et al., 2015) and (Clarida et al., 2021)

The event dates used in this study include information related to the use of UMP policy, including (i) liquidity provision, (2) asset purchases, and (3) forward guidance as officially announced by the Fed or its representative through Fed/FOMC meetings/announcements

Detailed statistics for the research event dates are detailed in Table 3.2, Table 3.3, and

Table 3.2: Event dates during the global financial crisis period

Events US day Vietnamese day Note

4 1/28/2009 1/29/2009 Vietnamese Lunar New Year holiday

Source: FED & Bowman et al (2015)

During the period of GFC, there were 22 event dates to test the reaction of the Vietnamese stock market Due to the time zone difference between the two countries, the event dates of Vietnam are determined to be adjacent trading days of the Vietnam market If the Fed's announcement date is Friday in the US, the event date in Vietnam will be the second consecutive week (2 working days away from the US announcement date (event 9 th ) If it falls on a public holiday and weekend, the event date in Vietnam will be the next trading day after the holiday (event 15 th ) The 4 th event date was removed due to coinciding with the Vietnamese Lunar New Year holiday Finally, after considering the relevant facts, the study will use 21 event dates for this period

Table 3.3: Event dates during the COVID-19 pandemic period

Events US day Vietnamese day Note

Source: FED and Clarida et al (2021)

Like the above, the event dates selected in COVID-19 are related to the US’s UMP tools For this period, the study will use 14 event dates

(ii) Data on stock prices adjusted for the influence of business-related events such as dividends, issuing more shares , and VNindex These data are collected from the Ho Chi Minh City Stock Exchange (HOSE)

To assess the reaction of the Vietnamese stock market to announcements related to the US's UMP This study will focus on analyzing the response of the return on the market portfolio and stock portfolio in different sectors The stocks are selected in the same sectors based on the GICS sub-sector This study focuses on stocks listed on HOSE, a market where many listed companies are concentrated, and the total capitalization of the listed companies accounts for the main proportion of the Vietnamese stock market The details of GICS classification standards are presented in Appendix 1

When calculating the abnormal returns of stocks, 250 trading observations are required to determine abnormal returns, so the stocks selected in the studied events must have traded at least 250 trading days before the event date The number of specific stocks and event dates in the GFC and COVID-19 pandemic periods are shown in Appendix 2.

Data for SVAR model

Database of monetary policy transmission topics usually include macroeconomic factors such as interest rate, exchange rate, money supply, GDP, inflation, asset prices, etc Although these data are typically collected from variously reliable sources such as the International Monetary Fund (IMF), World Bank, Asia Regional Integration Center (ARIC), Bank for International Settlements (BIS), etc., using such secondary data sources may have some issues as follows: Firstly, macroeconomic data might be inaccurate in some level because they represent information about the entire economy with a variety of sectors and elements, making it susceptible to affected by statistical processing, time, etc Secondly, most studies use historical data that has not been updated to reflect the state of the economy at the time they were conducted, which can cause study findings to be applied to reality later than expected Finally, some data may be missed because the statistical systems in developing nations are still relatively weak, making it challenging to collect historical data (Nguyễn,

This study is no exception when it comes to using secondary data Specifically, with monthly data, this study examines the worldwide spillover effects of the United States' UMP on the Vietnamese economy, concentrating on the real economy The data span from January

2007 to April 2022, including total assets Fed’s balance sheets (UMP), VIX index (VIX), foreign portfolio investment flows to Vietnam (CF), Vietnam’s stock price (SP), the market interest rate in Vietnam (IRR), the nominal exchange rate of USD/VND (FOREX), Vietnam output (GDP), and Vietnam inflation (CPI) All data are collected primarily from IMF and HOSE The VIX index is compiled in the Chicago Board Options Exchange (CBOE) and the Fed’s balance sheet in the Federal Reserve Bank This study analyzed the period of 16 years in case of international effect because this period will cover enough different stress market states in global economic conditions such as GFC (2008-2009), the European debt crisis (2010-2013), the change into policy normalization in the US (2014-2017), a slight difference in monetary policies in AEs during uncertain economic conditions (2018-2019) and the global pandemic crisis since the COVID-19 appeared at the end of 2019 until present It will most fully reflect the effects of the US’s UMP over different periods, especially during the GFC and pandemic crisis, resulting in significant economic downturn following the large- scale implementation of a series of UMPs in the US during these periods

Table 3.4 below contains further information on the variables used in the SVAR model

Table 3.4: Description of variables and source of data

Unconventional monetary policy of the US CBB Total assets of central banks in the US (% change)

Fred – Economic data Option-implied volatility index VIX Percentage change in VIX index CBOE

The logarithm of foreign portfolio investment inflows to Vietnam

Stock market return of Vietnam (% change in VN- Index)

HCMC Stock Exchange (HOSE) Vietnam's market interest rate IRR Percentage change in market lending rate (%) IMF-IFS Vietnam Exchange rate FOREX

Logarithm of the nominal exchange rate of Vietnam dong against the US dollar

Vietnam output GDP GDP growth rate of

Vietnam inflation CPI Percentage change in consumer price index (%) IMF-IFS

RESEARCH HYPOTHESES

To elucidate the research questions presented in the preceding section, this part of the study proposes research hypothesis These hypotheses pertain to the influence of the United States’ unconventional monetary policies on both the financial market and the real economy Specifically, the focus is on the repercussions of these policies on during periods of crisis

Hypothesis 1: Vietnamese financial market responses positively to announcements related to the US's UMP in the global financial crisis and the COVID-19 pandemic period

To make this first research hypothesis more specific, the study will consider two sub- hypotheses Hypothesis 1.1 examines the instant respond of the entire stock market, while Hypothesis 1.2 considers the reactions of different sectors to US’s UMP announcements The most important theoretical basis for these hypotheses is the Efficient Market Hypothesis In addition to Tobin’s q theory and the discounted cash flow theory, which explain the increase in asset prices when interest rates decrease These hypotheses are proposed based on the first research question

Hypothesis 1.1: The Vietnamese stock market responses positively to announcements related to the US's UMP in the global financial crisis and the COVID-19 pandemic period

The appearance of ARs and CARs with the announcements is based on the theory of the Semi-strong form of EMH; specifically, the market will react immediately to the announcement In this case, the announcements about the US’s UMP to support the economy in times of crisis are positive news for the market Võ and Đặng (2018) also reveal that the Vietnamese stock market responds to information about the monetary policies of the United States

Hypothesis 1.2: The different sectors reacted positively to announcements related to the US's

On the stock market, listed companies operate in different sectors 8 and fields Each sector has its characteristics of operations and business, when new information appears in the market, stock prices of sectors will react differently Defensive sectors such as consumer staples and healthcare usually operate stably during crisis periods Material and industrial sectors will benefit when the economy recovers, while during a global financial crisis, the financial sector is the most negatively affected In the research conducted by (Galloppo & Paimanova, 2017; Lubys & Panda, 2021), the results also indicate that the reactions of various sectors differ in response to the published information However, in Vietnam, there is limited research on the reactions of sectors to the released data

Hypothesis 2: The US’s UMP positively affects the real economy of Vietnam in the global financial crisis and the COVID-19 pandemic period

This hypothesis is built based on Taylor’s rule for monetary policy operation, where a decrease in interest rates will stimulate investment and consumption activities, thereby promoting economic growth and affecting inflation The money demand theory of Friedman, Tobin’s q, and the MFD model also explain the impact of interest rates on factors such as capital flows, asset prices, exchange rates, etc., which in turn affect GDP and CPI In addition,

8 Different sectors are divided according to the criteria and classification method of GICS Currently, the stocks of listed companies on the HOSE are divided into 11 sectors Details about these sectors are presented in Appendix 1 a study by Anaya et al (2017) showed that portfolio flows from the US to EMEs are dramatically increased by an expansionary policy shock, accompanied by a durable movement in fundamental and financial variables in the receiving countries Besides, a study in the Asian and Pacific region also showed similar evidence Vietnam is both a small, open economy and belongs to the group of frontier markets; it also takes a few years to upgrade to the emerging market level from the current frontier market classification The US’s UMP might significantly affect the Vietnamese economy, as previous studies about EMEs and other Asian developing countries show This hypothesis is based on the second research question

Hypothesis 3 : There are differences in the reaction of Vietnamese financial market and real economy related to the US’s UMP during the GFC and COVID-19 pandemic

This hypothesis is derived from the third research question However, due to the scope of the research subjects and the research method, this hypothesis is divided into sub hypotheses, 3.1, 3.2, and 3.3 These hypotheses respectively examine the differences in the impact of the US’s UMP on the entire stock market, on the sectors, and on the indicators of the real economy

Hypothesis 3.1 : There are differences in the reaction of the Vietnamese stock market to announcements related to the US’s UMP during the GFC and COVID-19 pandemic

The global financial crisis originated in developed countries, specifically the US, then spread to other countries To support the economy, the US implemented UMP in different stages, which lasted from 2008 to 2013 While the COVID-19 epidemic related to the health sector caused countries to blockade, the government UMP books in this period were implemented continuously and without limitation However, this period of the US’s UMP only lasts from 3/2020 to 9/2020

Hypothesis 3.2: There are differences between sectors with announcements related to the

US’s UMP during the GFC and the COVID-19 pandemic period

As mentioned above, different sectors have their characteristics, and the US implementation of UMP during the GFC and COVID-19 pandemic is also different These issues led to varying responses across sectors in the two periods

Hypothesis 3.3: Vietnam’s real economy responds more strongly to the shock of the US’s UMP during COVID-19 than the previous global financial crisis

Although not concentrating on the real economy or comparing crises in the past, these studies indicated that the response to the impact of COVID-19 is different for each country or group of countries (Liu et al., 2020; Sansa, 2020; Yilmazkuday, 2023; Zeren & Hizarci,

2020) However, there is still evidence that the interventions via unconventional tools during COVID-19 are higher when compared to earlier interventions made during the Great Recession (Cortes et al., 2022; Rebucci et al., 2022) Although there is no consensus on evidence that definitively states that the effects of the US’s UMP during COVID-19 are higher or smaller than its impacts in the GFC period, in comparison to prior crisis periods, some research implies that EMEs are more vulnerable to large-scale interventions (the COVID-19 QE announcements), whether domestic or foreign Similarly, the impact of US economic policy and the fluctuations in the world's economic policy significantly impact the Vietnamese market Thus, during the COVID-19 era, the real economy of Vietnam responded to the US’s UMP shocks more strongly than it did to the previous global financial crisis

Based on macroeconomic theories as well as models that have been verified by empirical research This study investigates the international spillover effects of the US's UMP on the Vietnamese financial market and economy In this chapter, the analysis details the steps taken for the event study method and the research questions and hypotheses The study employed two research methods to align with distinct aims First, the event study method examines the impact of the US’s UMP announcements on the Vietnamese stock market as a whole and in two periods: the global financial crisis and the COVID-19 epidemic The data used for the study included US’s UMP announcements by Fed and research by (Bowman et al., 2015) and (Clarida et al., 2021) data Stock prices and Vnindex are collected from the Ho Chi Minh City Stock Exchange Second, the research uses SVAR with short-term restrictions to test the response of Vietnam output and inflation to UMP shocks from the US, with the support of international and domestic transmission channels The data in the model are collected from reliable sources, such as IMF, CBOE, HOSE, etc Both research procedures and testing hypotheses are also clearly suggested in this chapter The next chapter will use the models and variables outlined in this part for experimental research.

OVERVIEW OF THE FINANCIAL MARKET AND ECONOMY IN

Overview of the financial market in Vietnam from 2000 to 2022

4.1.1.1 Market size during the period from 2000 to 2022

As outlined in the scope of the study presented in Chapter 1, the financial market under analysis is the stock market, primarily represented by the equity market Since its official operation in 2000, the stock market in Vietnam has achieved various positive outcomes It has also been subject to multiple impacts, notably during the global financial crisis and the recent COVID-19 pandemic

Figure 4.1: The number of listed companies on the HOSE during the period from

Number of listed company Accumulated number

Figure 4.1 illustrates the number of listed companies on the Ho Chi Minh City Stock

Exchange (HSX) from 2000 to 2022 In the initial years of the market formation, the number of listed companies was modest, with only about 17 listing companies by the end of 2005 Transitioning into the period from 2006 onwards, the number of listed companies on the HSX experienced a remarkable increase The number of newly listed companies surged rapidly from 2006 to 2011 This period coincided with the global financial crisis that significantly impacted the Vietnamese stock market, extending until 2013, contributing to a reduction in the number of new listings from 2012 to 2014 Post-2015, following the fundamental conclusion of the global financial crisis, the number of newly listed companies gradually recovered However, the outbreak of the COVID-19 pandemic in 2019 had a considerable impact on the stock market, leading companies to reconsider listing, resulting in a decrease in the number of new listings from 2019 to 2022

Figure 4.2: The market capitalization during the period from 2000 to 2022

Like the number of listed companies from 2000 to 2022, the stock market's capitalization during this period, especially during the two global financial crises and the COVID-19 pandemic, also underwent significant changes Figure 4.2 illustrates the growth of market capitalization during 2006 when it increased dramatically from around 7,390 billion VND in 2005 to 147,967 billion VND, nearly twenty times in just one year The market capitalization continued to rise sharply in 2007 to 364,425 billion VND but declined to only 169,346 billion VND in 2008 From 2009 to 2011, the market was still unstable as

Billions VND the market capitalization experienced various fluctuations despite a significant increase in the number of listed companies (Figure 4.1) From 2012 onwards, the market gradually stabilized, and the market capitalization increased yearly However, during the COVID-19 pandemic, the market saw significant volatility in the early months of 2020 Despite this, by the end of the year, market capitalization had rebounded compared to 2019 (increasing by approximately 24.5%) Market capitalization experienced a remarkable increase in 2021 but decreased sharply in 2022

4.1.1.2 Fluctuations in the stock market during the period from 2000 to 2022

Like the market size, from 2000 to 2022, the Vietnamese stock market has also undergone significant fluctuations There were stages when market indices and trading volumes increased rapidly, but in many periods, the market became subdued, especially during times of crisis

Figure 4.3: VNINDEX and the total trading volume during the period from 2000 to

Figure 4.3 shows that the Vietnamese stock market has undergone various fluctuations since its start in 2000, with the GFC and the COVID-19 pandemic being the

Trading Volume VNINDEX most volatile stages More detailed insights into the fluctuations during crisis periods are presented in Figure 4.4 and Figure 4.5

Figure 4.4: VNINDEX and trading volume during the global financial crisis period

The GFC originated in the United States in mid-2007 when financial institutions faced difficulty recovering mortgage-backed loans This crisis quickly spread to developed countries like the UK, France, and Spain Its pinnacle was the bankruptcy declaration of the

US investment bank Lehman Brothers on September 15, 2008 In that context, the Vietnamese stock market also experienced significant impacts Figure 4.4 illustrates that during this period, the stock market underwent a sharp decline, with the VNINDEX plummeting from over 1,100 points at the beginning of 2008 to a continuous decrease, reaching a low of 235.5 points on February 24, 2009 The stock market then showed signs of recovery, but by the end of 2013, the market index only reached 504 points Despite the prolonged support policies from countries worldwide and Vietnam during this period, the stock market could not fully recover to the pre-crisis level

Figure 4.5: VNINDEX and trading volume during the COVID-19 pandemic

Once again, significant global disruptions occurred in December 2019 when a new virus strain appeared in Wuhan, China, rapidly spreading worldwide The swift and uncontained transmission and a lack of effective prevention and treatment prompted countries worldwide to implement lockdowns and social distancing measures to curb the spread The economies of many nations virtually came to a standstill Consequently, the global financial markets were not immune to the severe impacts of the pandemic As (Figure

4.5) shows, in Vietnam, the stock market underwent a sharp decline at once after the Lunar

New Year in 2020 The VNINDEX, starting at 991.46 points on January 22, 2020, dropped to 659.21 points on March 24, 2020 (a decrease of 33.51%) However, the market began to recover thanks to domestic and international economic support policies and programs In Vietnam, the VNINDEX quickly surpassed pre-COVID-19 levels.

Overview of Vietnamese economy from 2000 to 2022

4.1.2.1 Economic growth of Vietnam from 2000 to 2022

Since the beginning of economic reforms in the late 1980s, the Vietnamese economy has progressively integrated into regional and global networks, achieving notable accomplishments Vietnam officially joined the Association of Southeast Asian Nations

(ASEAN) in 1995, the Asia-Europe Economic Forum, became a member of APEC in 1998, and formally acceded to the World Trade Organization (WTO) in 2007 Participation in these organizations and forums has brought significant opportunities and challenges to Vietnam's economy in the later years

Figure 4.6: GDP growth of Vietnam from 2000 to 2022

Figure 4.6 illustrates Vietnam's GDP growth fluctuations from 2000 to 2022, especially during crises From 2000 to 2007, GDP growth consistently remained high, averaging around 7% per year, with a notable peak of 7.8% in 2004 However, when the world plunged into the financial crisis, Vietnam's economy was not immune to adverse impacts, experiencing a decline in GDP growth from 7.1% in 2007 to only 5.7% in 2008 In this period, GDP growth in 2012 reached its lowest point at 5.2%, the lowest in the preceding decade Following the financial crisis, Vietnam's GDP growth gradually improved, notably with higher growth in the years following 2014 The growth rate in these years was equivalent to before the financial crisis However, once again, with the outbreak of the COVID-19 pandemic, Vietnam's GDP growth in 2020 decreased to only 2.9% and further to 2.6% in

2021 These figures stand for the lowest growth rates in 20 years There was a partial recovery in GDP growth in 2022, reaching an impressive 8.02%

In summary, the growth results over the years, as presented above, clearly write down that Vietnam has benefited significantly from economic integration However, the global financial crises and the COVID-19 pandemic have affected Vietnam's economy

4.1.2.2 Inflation in Vietnam during the period from 2000 to 2022

In addition to the economic growth achievements, Vietnam's inflation from 2000 to

2022 has also experienced various fluctuations, especially during the global financial crisis.

Figure 4.7: Inflation in Vietnam from 2000 to 2022

Figure 4.7 illustrates the inflation dynamics in Vietnam from 2000 to 2022 In the early years of the 21st century, inflation was kept at a low level, with even a deflation phenomenon in 2000 and 2001 However, inflation then increased rapidly from 2004 to 2007, rising from 3.8% in 2002 to 8.3% in 2007 This period also marked Vietnam's high economic growth (Figure 4.6) In 2008, the global financial crisis had an apparent effect on the Vietnamese economy, with a sharp decline in GDP growth accompanied by inflation reaching two-digit figures, reaching 23.1% This was the highest level in over 20 years From 2008 to 2013, inflation remained high, although it experienced a slight decrease in some years High inflation was influenced by fiscal and monetary policies aimed at supporting the economy to overcome the negative impacts of the crisis In the later years, Vietnam managed to control inflation below 3.5% per year, even during the COVID-19 pandemic Inflation remained around the 3% threshold, reaching only 1.8% in 2021

In summary, it can be seen that the inflation index in Vietnam has undergone significant fluctuations during the two periods of the global financial crisis and the COVID-19 pandemic During the financial crisis, inflation increased significantly, reaching double-digit

25.0% figures, while during the COVID-19 pandemic, inflation was controlled and maintained below the target set by the National Assembly.

RESEARCH RESULTS FROM ESM

The reaction of the market to the US’s UMP announcement

4.2.1.1 Abnormal average return of the market

The AAR results of the market portfolio on the event date and the days around the event date in different event windows are presented in Table 4.1 In this table, the study shows the results of abnormal average returns (AAR) according to the market and risk- adjusted model (Formula 3.4) with the non-parametric test (using the Patell Test)

Table 4.1: The AAR of the market around the US’s UMP event dates

Date GFC period COVID-19 period Two periods

Source: calculated from research data

The results of Table 4.1 show that the Vietnamese stock market had a positive response to all observations of the US’s UMP event in both periods, as shown in the AAR around the event date Specifically, on the days before the event date from -5 to -1, the market appeared AAR fluctuated around -0.16% to 0.24%; on most observation days, the AAR values are statistically significant at the 1% significance level, except for the days -5 and -4 during the COVID-19 pandemic period The market's positive ARR was kept for the following days (days +1 and +2), and then the AAR turned negative for the following days

The results also show that on the day of the UMP event, the market responded most positively with an ARR of 0.19% and statistically significant at 1% This result is consistent with hypothesis 1.1: The Vietnamese stock market responses positively to announcements related to the US's UMP in the global financial crisis and the COVID-19 pandemic period However, when looking at each stage of GFC and COVID-19, the ARR in these two stages has some differences

During the GFC period, the market changed when the US’s UMP announcement was released; this is shown by the fact that on the day that UMP was announced (day 0), the market was positive and statistically significant AAR with a 1% significance Meanwhile, the AAR is negative the days before the event date (days -1 and -2) After the UMP event day, the market's uptrend continued to keep until +4 The positive AAR result is statistically significant at a 1% significance level on days +2 and +4; the highest AAR value after the event date is on day +4 This result is also consistent with (Galloppo & Paimanova, 2017), where information about US expansionary monetary policy positively impacts India and China on the event day

During the COVID-19 pandemic period, like the GFC period, the market showed a discernible positive (AAR is 0.19%) response to the announcement information on the event date This positive reaction was clear at the AAR level and reached statistical significance at the 1% confidence level Nevertheless, throughout this period, the market proved more pronounced reactions before the US’s UMP official announcement This is illustrated by the sustained positive AAR from the day close to the event date (date - 1) to the day just before the official announcement (-5 days) After the event date, the positive AAR is still consistent until +2 This can be attributed to the extensive and frequent US UMP implementation during this period Notably, in the latter part of March 2020, the U.S consistently executed UMP on a large scale On 3/23/2020, the Federal Open Market Committee (FOMC) announced its intention to continue purchasing Treasury securities and agency Mortgage-Backed Securities (MBS) "in the amounts needed." Additionally, it expanded its purchases to include the agency Commercial Mortgage-Backed Securities (CMBS) for the first time Detailed information about the use of U.S Unconventional Monetary Policy (UMP) is disclosed on the event dates in both GFC and the COVID-19 pandemic periods and is presented in Appendix 3 The differences in the market's reaction to the US’s UMP announcements before the event also prove hypothesis 3.1: There are differences in the reaction of the Vietnamese stock market to announcements related to the US’s UMP during the GFC and COVID-19 pandemic

When combining all observations for the two periods of the US’s UMP, the results show that the AAR of the COVID-19 pandemic period significantly affects the overall results for both periods Suppose in the GFC period, the windows -5, -2, and -1 have negative values

In that case, when considering both phases, the opposite is true (like the COVID-19 pandemic period); this result is statistically significant at the 1% level The outcomes for both periods affirm the impact of the COVID-19 phase (as detailed in Table 4.1) and the general trend of AAR for each day before and after the event day If we combine the US’s UMP events for both periods, the result is like the COVID-19 pandemic phase This result shows that the observations during the COVID-19 pandemic phase significantly control the overall results when concluding the impact of the US’s UMP on the volatility of the Vietnamese stock market around event days (Figure 4.8)

Figure 4.8: The AAR of the market around the US’s UMP event dates

Source: Author's drawing from research results

In summary, the research results show that (i) there is a positive AAR occurrence on the Vietnamese stock market when there is information about the US’s UMP and (ii) there is a difference in the two periods; this is due to the differences in the context of UMP implementation as well as the size and frequency of UMP implementation by the US in each crisis period The results of nonparametric testing (using the GRANK Test in Appendix 3) show statistical significance at the 1% level for the AAR of both pre-and post-event days This once again confirms the statistical significance of the research findings

4.2.1.2 Cumulative average abnormal return of the market

To take a closer look at the short-term reactions around the event date, the study will figure out the CAAR of the market in different event windows The analysis is considered in different periods and uses the same tests as above

Table 4.2: The CAAR of the market around the US’s UMP event dates

Date GFC period COVID-19 period Two periods

Source: calculated from research data

Table 4.2 shows the CAAR of the market in different event windows including the

CAAR of the preceding day and the event date [-1;0], time frames from the event date onwards 1 to 3 days ([0;+1], [0;+2], [0;+3]), different time frames around event date ([-1;+1], [-3;+3 ],[-5;+5]) The research results indicate that during the GFC period, the CAAR of the market gradually increased after the event date (day 0); specifically, the CAAR is 0.18% for the [0;+1] window, reaching the highest at 0.5% for the [0;+3] window, while the CAAR for windows including days before and after the event is more minor This proves that the US’s UMP announcements during this period positively affected the Vietnamese stock market, with the market showing an increasing trend from the day the information was announced and maintaining an upward trend until the third day after the event In contrast, the trend of CAAR during the COVID-19 period, the results of event windows from after the information about the US’s UMP was announced, shows that the market still keeps an upward trend However, it only increases until the second day after the event, and the increase is not as high as in the GFC period Additionally, the market tends to rise before the event, as showed by the larger CAAR for windows before and after the event compared to windows from the event date onwards This result is partly due to the consecutive announcement of events during this period within a short timeframe The information about the US’s UMP during this period is concentrated when the Vietnamese stock market quickly recovered after a significant decline, as analyzed in Figure 4.5

Unlike the AAR for individual days, the CAAR reflects the cumulative returns of the days surrounding the event date Specifically, during the GFC period, the positive accumulation trend appeared in the event windows from the event date onward; the CAAR gradually increased over the days from +1 to +3, and the remaining event window frames stayed the same, due to the accumulation of CAAR in the post-event period The positive market reaction after the event is consistent with (Chen et al., 2012; Rai & Suchanek, 2014) Incredibly, it's compatible with (Lubys & Panda, 2021), with the GFC period, the US's UMP in late 2008 had the most significant impact on all the BRICS countries Besides, The EU appears to be less influential throughout the announcements and industries impacted, which contradicts the regions' interconnectivity since trade flows are more significant or comparable to the US with most BRICS countries (Lubys & Panda, 2021) This is consistent with the scope of this study, considering only the effect of the US's UMP

Figure 4.9: CAAR of the market during the GFC period and COVID-19 period

Source: Author's drawing from research results

In contrast to the results in the GFC period, the market reacted positively to the information about the US’s UMP Figure 4.9 shows that during the COVID-19 pandemic, the CAAR of the event windows after the event date tends to decrease earlier and is smaller than the CAAR of the event windows around the event date This shows that the market has increased before the information is released due to the expectations of policies to support the

US economy Most CAAR results in different event windows are statistically significant at a

1% significance level One thing in common in both periods is that the CAAR stays positive for the event windows after the event date, although the volatility trend is different

For both periods, as AAR, the CAAR of the event windows tends to be like the period of the COVID-19 pandemic This shows that the results of the COVID-19 pandemic period influence the overall CAAR results for both periods

In summary, the research results show that CAAR is like AAR, the US’s UMP news is good news, and the Vietnam stock market reacts positively in time event windows around event dates The findings related to the Vietnamese stock market response to the US’s UMP announcements during the GFC and the COVID-19 pandemic have provided insights into research questions 1 and 3, as elaborated earlier Additionally, these results underscore the validity of research hypothesis 1 and research hypothesis 2.

The reaction of different sectors to the US’s UMP announcement

4.2.2.1 Abnormal average return of different sectors

The US’s UMP announcement elicited a positive response from the Vietnamese stock market To delve into the influences more thoroughly, the study will meticulously analyze various sectors within the market during the examined periods

Table 4.3: AAR of different sectors during the GFC

Date Health Care Consumer Discretionary Real Estate Utilities Energy Information Technology Financial Consumer Staples Industrials Materials

Source: calculated from research data

Table 4.3 shows the average daily returns around events related to the US’s UMP announcements The analysis dates include the event date (day 0), five days before the event date (from -5 to -1), and five days after the event date (from 1 to 5) The results show that all 10/10 sectors show positive AAR on the event day The AAR result is statistically significant in three sectors: energy, consumer staples, and industrials; the positive AAR ranges from 0.02% (Finance) to 0.36% (Energy) After the event day, positive AAR is only sustained in 2/10 sectors; however, on the second day (+2), AAR turns positive again for 9/10 sectors In the following days, the positive return trend is no longer kept The study will analyze the CAAR in time windows around the event date to better see the profit trend before and after the event date

Table 4.4: AAR of different sectors during the COVID-19 pandemic

Date Health Care Consumer Discretionary Real Estate Utilities Energy Information Technology Financial Consumer Staples Industrials Materials

Source: calculated from research data

Table 4.4 illustrates the AAR of sectors on the event date, both before and after The results show that 9/10 sectors show a positive ARR on the day when information related to the US's UMP during the COVID-19 pandemic is announced The AAR on the event date ranges from -0.16% to 0.38% The financial, energy, and industrial sectors have a positive AAR and the highest prices, while only the information technology sector has a negative AAR Additionally, the AAR is statistically significant at the 1% level for the financial and industrial sectors

However, the number of sectors with a positive AAR diminishes in the later days Specifically, on day +1, there are 7/10 sectors; on day +2, there are 6/10; and on day +3, only 2/10 sectors keep a positive AAR This suggests that the Vietnamese stock market positively responds to the information released by the Fed about the implementation of UMP tools, with the most pronounced reaction occurring on the announcement date As time progresses after the announcement date, the AAR of sectors no longer sustains a positive response During this period, it appeared that the sectors reacted before the announced information of the announcement date of the UMP event; the stock price increased earlier, as shown by the AAR on -1 days; -2 and -3 were positive in Real Estate, Utilities, and Energy, Financial, Industrials, Materials but from the date of the event onwards these sectors could no longer maintain AAR as before the event date AAR reversed to decrease, except in the financial sector The remaining sectors are mostly negative before the AAR event date

4.2.2.2 Cumulative average abnormal return of different sectors

This study will analyze the CAAR of sectors across various event windows for a more detailed examination of market reactions in the preceding and following events

Table 4.5: CAAR of sectors during the global financial crisis

Average Cumulative Abnormal Return (CAAR)

Date Health Care Consumer Discretionary Real Estate Utilities Energy Information Technology Financial Consumer Staples Industrials Materials

Source: calculated from research data

The results of the CAAR across the event frames are shown in Table 4.5; the results show that not only on the event date and the time windows after the event date, but specifically the event windows [0;+1], [0;+2] and [0;+3] also have up to 9/10 positive CAAR excluding Information Technology sector This positive CAAR ranges from approximately

0.04% (Real estate) to 0.96% (Energy), with statistical significance at a 1% level The sector that responded most positively was the Energy sector, while the financial sector had the lowest cumulative positive profit after the event date The study also looked at the pre-event time window [-1;0], and the window includes the days both before and after the event date [-1;+1], [-3;+3] and [-5; +5] The results show that there are still positive CAARs in these event windows, but the number of sectors with positive CAARs is lower than the event window from the event date onwards This result is also consistent with (Galloppo & Paimanova, 2017; Lubys & Panda, 2021) when they show the reactions of the different sectors to the announcements of the US monetary policy, especially the announcements of the expansionary monetary policy and the 1 st announcement made by the US monetary authorities which took place in late 2008 had the most significant impact over all the BRICS countries, on the other hand, EU appears to be less impactful across the announcements and sectors affected The results about the CAAR of sectors during the GFC period are consistent with the overall market trend

Table 4.6: CAAR of sectors during the COVID-19 pandemic

Average Cumulative Abnormal Return (CAAR)

Date Health Care Consumer Discretionary Real Estate Utilities Energy Information Technology Financial Consumer Staples Industrials Materials

Source: Source: calculated from research data

Table 4.6 shows CAARs of other sectors across timeframes from the event date onwards, including the [0;+1], [0;+2], and [0;+3] windows The windows before the event date extend past the event date [-1;+1], [-3;+3], and [-5;+5], and the timeframe includes the event date and pre-dates the event one day [-1;0] The results show that in the frame [0;+1], there are 10/10 days of positive cumulative profit with the lowest CAAR of 0.07% and the highest of 0.68% in the financial sector During the time windows [0;+2] and [0;+3], CAAR remained positive for 9 out of 10 sectors, with the CAAR of many sectors showing statistical significance at various p-value levels Like AAR on individual days, the CAARs of the real estate, energy, financial, industrial, and health care sectors kept a positive trend before and after the UMP event date Notably, the financial sector showed a positive CAAR after the event date The highest value reached 0.74%, which is significantly significant at the 1% level These sectors, particularly Health Care, benefited from the epidemic's impact or the maintenance of low-interest rates

The positive AAR and CAAR results across various sectors in the research's event windows partially address research question 1 and support research hypothesis 3.2: There are differences between sectors with announcements related to the US’s UMP during the GFC and the COVID-19 pandemic period While most sectors react positively when information about the US’S UMP is announced, the only information technology sector during the COVID-19 pandemic shows a negative AAR on the event day The positive trends in AAR and CAAR are sustained for windows, typically ranging from 3 to 4 days post-event (except for the energy sector)

However, before information about the US’s UMP policy, in addition to positive AAR and CAAR on various days and windows, as analyzed above, there are still specific differences between some sectors in the two periods of the GFC and the COVID-19 pandemic Details about the CAAR trends of sectors are illustrated in Figure 4.10

Figure 4.10: CAAR of sectors during the GFC and COVID-19 periods

Source: calculated from research data

Figure 4.10 illustrates the CAAR for five days before and five days after the event ([-

5;+5]), which is a suitable timeframe to examine the impact of US’s UMP information on different sectors The results show: (i) There is a similarity in the CAAR fluctuations in sectors: health care, energy, consumer discretionary, industry, and materials, with CAAR gradually increasing from the event day onwards, although the upward trend only lasts until day +2 or +3, except for the Energy sector where CAAR sustains growth until day +5 (ii) real estate and financial sectors during the GFC period show a decreasing trend in CAAR (negative CAAR after the event day), while in the COVID-19 period, they keep a positive CAAR (iii) consumer staples and information technology sectors, despite the increasing CAAR trend after the event day, have an overall negative cumulative CAAR (iv) The utility sector shows a gradual CAAR increase after the event day during the GFC period, in contrast to the COVID-19 period The results about the market's reaction to the US’s UMP announcements in the two crisis periods have provided additional insights into answering third research question and have proved research hypothesis 3.

Robustness test

In the previous section, the study used the market and risk-adjusted model or the market model to determine market and sector-specific AAR and CAAR In this section, the study will employ the market-adjusted model to assess abnormal returns, aiming to reexamine the research findings and ensure the robustness check of the results All procedures and tests for ESM are done as in previous work in section 3.1.1

Figure 4.11: CAAR of the market during the GFC period and COVID-19 period by the market-adjusted model

Source: Source: calculated from research data

Figure 4.11 illustrates the CAAR results of the market figured out by the market- adjusted model, which aligns with the market and risk-adjusted model findings when the CAAR results keep an upward trend until +2 days after the event date This shows a trend of gradually increasing CAAR accumulation after the event date, followed by a decline in the days further from the event Detailed results about AAR and CAAR are presented in

Figure 4.12: CAAR of sectors during the GFC and COVID-19 periods by the market-adjusted model

Source: Source: calculated from research data

The cumulative CAAR results within the [-5;+5] window for different sectors is detailed in Figure 4.12 The CAAR results for sectors in both periods show a similar trend to the CAAR figured out by the risk-adjusted and market models The CAAR results consistently keep positive accumulation, gradually increasing in the days following the event date However, the Information Technology sector shows a distinct trend, with its CAAR decreasing in both periods after the event date These results are statistically significant at the 1%, 5%, and 10% levels based on parameter testing (Patel Test) and non-parametric testing (Generalized Rank Test) Details on AAR, CAAR, and statistical testing are presented in Appendix 5

The results affirm the robustness of estimating the AAR and CAAR outcomes of the study This reflects the positive impact of announcements on implementing the US’s UMP on Vietnam's financial markets around the event day.

Discussing research results

In this section, the study will discuss the reaction of the Vietnamese stock market and different sectors to events related to the US’s UMP policy announcement

4.2.4.1 Similarities between the two periods

During the GFC of 2007-2008 and the COVID-19 pandemic, the United States implemented similar UMP to alleviate economic difficulties and stabilize financial markets Fed responded to the GFC by initiating Quantitative Easing measures, which involved the purchase of significant quantities of longer-term securities and the reduction of interest rates to nearly zero Similarly, during the COVID-19 pandemic, the Fed recommended and broadened QE programs to reduce long-term interest rates and ensure market stability Interest rates were again lowered to nearly zero, providing a substantial monetary stimulus Forward guidance was used to shape market expectations regarding the future trajectory of

GFC Period COVID-19 Period interest rates In both crises, emergency lending facilities were set up to aid various sectors, guaranteeing the smooth operation of financial markets and credit availability Currency swap agreements with other central banks alleviated global funding market pressures The UMP implemented during these crises proved a commitment to liquidity provision, financial market support, and the promotion of economic recovery

On the US’s UMP event date, the AAR of the market is positive and statistically significant in both study periods, which confirms that the Vietnamese stock market has reacted to US’s UMP policy information Thus, we can see the market's efficiency and the impact of the US macro policies on the Vietnamese market, especially monetary policy

The post-event windows [0;+1] and [0;+2] still keep positive CAARs even though these post-event date AARs for many sectors are negative, which once confirmed the positive market reaction on the day of the event As the days move further from the event date, the AAR of the market turns negative

Health Care, Energy, Industrials, material, and consumer staples sectors reacted similarly when maintaining CAAR before and after the event date This is counter- characteristic of a crisis-preventive sector (health care, consumer staples, material) and a sector that highly benefits from monetary policies to support economic recovery (Energy, Industrials) in times of crisis

4.2.4.2 Differences between the two periods

While the United States enacted UMP during the GFC of 2007-2008 and the COVID-

19 pandemic, their specific strategies showed notable differences During the GFC, Fed primarily concentrated on QE, which involved large-scale asset purchases, including mortgage-backed and longer-term Treasury securities, to reduce long-term interest rates The initial round of QE was announced and started in November 2008, with the primary objective of lowering financial market instability and stabilizing the US economy After the conclusion of QE1 in March 2010, QE2 was launched in November 2010, followed by Operation Twist in September 2012 and another wave of QE (QE3) in September 2012 (Belke, 2018) Forward guidance and interest rate reductions were also used

In contrast, during the COVID-19 pandemic, Fed resumed QE and introduced new facilities and tools These included corporate bond purchases, lending programs for Main Street businesses, and special-purpose vehicles to support various sectors The response to the pandemic involved a quicker and more extensive use of emergency lending facilities to stabilize financial markets and address liquidity issues in specific sectors The scale and variety of tools deployed during the COVID-19 pandemic reflected the unprecedented nature of the economic challenges posed by the global health crisis

During the global financial crisis before the event, the AAR of many sectors was negative; specifically, on -1, there were 6/10 sectors, while on -2, 10/10 sectors were negative However, in COVID-19, a few sectors had negative AAR before the event date, precisely one day There were 3/10 sectors, while two days before the event date, it was 2/10 sectors This difference is because, in the GFC period, the US’s UMP policy was implemented for a long time, from 2008 to 2013, with diverse levels of implementation by the Fed, while in the COVID-19 period, the UMP was implemented in a shorter period (From March 13 to September 17) and focusing on a series of consecutive announcements on March 13-24, so positive AAR appeared a lot during this period; this result is consistent with the analysis

The real estate, industrials, materials, and finance sectors during the COVID-19 pandemic had a much more positive response than during the GFC period; stocks in these sectors kept positive AAR and CAAR and high statistical significance The financial and real estate sectors during the COVID-19 pandemic showed much better AAR and CAAR trends than they did during the financial crisis period However, the information technology sector showed contrasting CAAR trends between the GFC and COVID-19 periods.

RESEARCH RESULTS FROM SVAR

Correlation between variables

Figure 4.13 shows that during specific periods, such as 2007-2008 and amidst the challenges posed by the COVID-19 pandemic in 2020, a notable positive correlation emerged between the total assets of the FED and Vietnam's real GDP growth from 2007 to 2008, as the FED's total assets expanded, Vietnam experienced significant economic growth (6.62%), benefitting from favorable external conditions Similarly, during the COVID-19 crisis in

2020, the FED's asset purchases aimed at stabilizing the global economy appeared to coincide with Vietnam's resilience, as the country managed to keep positive GDP growth (4.21%) despite the pandemic's disruptions These instances underscore the interconnectedness of global financial institutions and the Vietnamese economy during critical junctures

Ja n -0 7 Ju l- 0 7 Ja n -0 8 Ju l- 0 8 Ja n -0 9 Ju l- 0 9 Ja n -1 0 Ju l- 1 0 Ja n -1 1 Ju l- 1 1 Ja n -1 2 Ju l- 1 2 Ja n -1 3 Ju l- 1 3 Ja n -1 4 Ju l- 1 4 Ja n -1 5 Ju l- 1 5 Ja n -1 6 Ju l- 1 6 Ja n -1 7 Ju l- 1 7 Ja n -1 8 Ju l- 1 8 Ja n -1 9 Ju l- 1 9 Ja n -2 0 Ju l- 2 0 Ja n -2 1 Ju l- 2 1 Ja n -2 2

Change in Fed's Balance Sheet Real GDP Growth

Figure 4.13: Correlation between total assets of FED and real GDP growth in Vietnam

Figure 4.14: Correlation between total assets of FED and inflation in Vietnam

Figure 4.14 illustrates that a discernible positive correlation appeared between the total assets of Fed and inflation in Vietnam in most stages of research In 2007-2008, as the Fed expanded its total assets to mitigate the global financial crisis, Vietnam witnessed increased inflationary pressures after that, driven in part by rising commodity prices Similarly, during the COVID-19 pandemic in 2020, the Fed's asset purchases aimed at stabilizing global financial markets had spill-over effects, contributing to inflationary tendencies in Vietnam, particularly in the context of disrupted supply chains However, there is a certain lag during crisis periods about this correlation

Figure 4.15: Correlation between shadow short rate of the US and real GDP growth in

Ja n -0 7 Au g -0 7 M ar-0 8 Oc t-0 8 M ay -0 9 De c -0 9 Ju l- 1 0 F eb -1 1 S ep -1 1 Ap r-1 2 No v -1 2 Ju n -1 3 Ja n -1 4 Au g -1 4 Ma r-1 5 Oc t-1 5 M ay -1 6 De c -1 6 Ju l- 1 7 F eb -1 8 S ep -1 8 Ap r-1 9 No v -1 9 Ju n -2 0 Ja n -2 1 Au g -2 1

Change in Fed's Balance Sheet Inflation

Ja n -0 7 Ju l- 0 7 Ja n -0 8 Ju l- 0 8 Ja n -0 9 Ju l- 0 9 Ja n -1 0 Ju l- 1 0 Ja n -1 1 Ju l- 1 1 Ja n -1 2 Ju l- 1 2 Ja n -1 3 Ju l- 1 3 Ja n -1 4 Ju l- 1 4 Ja n -1 5 Ju l- 1 5 Ja n -1 6 Ju l- 1 6 Ja n -1 7 Ju l- 1 7 Ja n -1 8 Ju l- 1 8 Ja n -1 9 Ju l- 1 9 Ja n -2 0 Ju l- 2 0 Ja n -2 1 Ju l- 2 1 Ja n -2 2

Shadow short-rate Real GDP Growth

It appears that there is a resemblance between the fluctuations in the shadow rate of the

US and real GDP growth and inflation in Vietnam However, it should be noted that the expansion of the Fed balance sheet concerns the decline in the shadow rate Therefore, there exists a noticeable negative correlation emerged between the shadow short rate of the United States and these two key economic indicators in Vietnam, especially during the GFC and pandemic crisis (Figure 4.15 and Figure 4.16)

Figure 4.16: Correlation between the shadow short rate of the US and inflation in

The relationship between the VIX index and real GDP growth in Vietnam during the pivotal periods of 2007-2008 and the COVID-19 pandemic has shown a notable negative correlation (Figure 4.17) In 2007-2008, as the VIX index, which measures market volatility and uncertainty, surged due to the global financial crisis (approximately 50), Vietnam's real GDP growth faced significant headwinds (3%) Still, it also had a certain lag, not immediately The heightened uncertainty adversely affected investor confidence and capital inflows, contributing to a slowdown in economic expansion Similarly, during the COVID-

19 pandemic, the VIX index experienced extreme fluctuations (53.5), reflecting the market's uncertainty and risk aversion Consequently, Vietnam's real GDP growth contracted temporarily (0.67%) as global supply chains were disrupted, and demand weakened only in

6 months These episodes underscore the sensitivity of Vietnam's economic performance to external shocks and highlight the inverse relationship between VIX volatility and economic growth during these challenging times

Ja n -0 7 Ju l- 0 7 Ja n -0 8 Ju l- 0 8 Ja n -0 9 Ju l- 0 9 Ja n -1 0 Ju l- 1 0 Ja n -1 1 Ju l- 1 1 Ja n -1 2 Ju l- 1 2 Ja n -1 3 Ju l- 1 3 Ja n -1 4 Ju l- 1 4 Ja n -1 5 Ju l- 1 5 Ja n -1 6 Ju l- 1 6 Ja n -1 7 Ju l- 1 7 Ja n -1 8 Ju l- 1 8 Ja n -1 9 Ju l- 1 9 Ja n -2 0 Ju l- 2 0 Ja n -2 1 Ju l- 2 1 Ja n -2 2

Figure 4.17: Correlation between the VIX index and real GDP growth in Vietnam

A negative correlation between the VIX index and inflation in Vietnam, particularly during the tumultuous periods of 2007-2008 and the COVID-19 pandemic, is also evident in

Figure 4.18 It underscores how heightened market volatility, as reflected by the VIX index, tended to be associated with reduced inflationary pressures in Vietnam during critical economic periods

Figure 4.18: Correlation between VIX index and inflation in Vietnam

Ja n -0 7 Ju l- 0 7 Ja n -0 8 Ju l- 0 8 Ja n -0 9 Ju l- 0 9 Ja n -1 0 Ju l- 1 0 Ja n -1 1 Ju l- 1 1 Ja n -1 2 Ju l- 1 2 Ja n -1 3 Ju l- 1 3 Ja n -1 4 Ju l- 1 4 Ja n -1 5 Ju l- 1 5 Ja n -1 6 Ju l- 1 6 Ja n -1 7 Ju l- 1 7 Ja n -1 8 Ju l- 1 8 Ja n -1 9 Ju l- 1 9 Ja n -2 0 Ju l- 2 0 Ja n -2 1 Ju l- 2 1 Ja n -2 2

VIX index Real GDP Growth

Ja n -0 7 Ju l- 0 7 Ja n -0 8 Ju l- 0 8 Ja n -0 9 Ju l- 0 9 Ja n -1 0 Ju l- 1 0 Ja n -1 1 Ju l- 1 1 Ja n -1 2 Ju l- 1 2 Ja n -1 3 Ju l- 1 3 Ja n -1 4 Ju l- 1 4 Ja n -1 5 Ju l- 1 5 Ja n -1 6 Ju l- 1 6 Ja n -1 7 Ju l- 1 7 Ja n -1 8 Ju l- 1 8 Ja n -1 9 Ju l- 1 9 Ja n -2 0 Ju l- 2 0 Ja n -2 1 Ju l- 2 1 Ja n -2 2

Figure 4.19 shows a positive correlation between foreign portfolio investment flows and real GDP growth in Vietnam It can be explained that this capital flow has played a pivotal role in driving economic expansion in the country by injecting capital into financial markets and various sectors of the economy As Vietnam's economic fundamentals have improved, FPI has become increasingly attractive to international investors seeking higher returns Consequently, as FPI flows have increased, real GDP growth in Vietnam has shown a corresponding upward trajectory, underscoring the significance of foreign portfolio investment as a catalyst for the country's sustained economic growth and development

Figure 4.19: Correlation between capital flow and real GDP growth in Vietnam

Similar signs also occur with inflation in Vietnam (Figure 4.20) While a direct positive correlation might not be immediately evident, FPI can contribute to inflationary pressures in certain circumstances When foreign investors inject substantial funds into the Vietnamese financial markets or specific asset classes, it can increase asset prices and create speculative bubbles This, in turn, can indirectly contribute to inflation by increasing the cost of living for ordinary citizens as asset prices rise

Ja n -0 7 Ju l- 0 7 Ja n -0 8 Ju l- 0 8 Ja n -0 9 Ju l- 0 9 Ja n -1 0 Ju l- 1 0 Ja n -1 1 Ju l- 1 1 Ja n -1 2 Ju l- 1 2 Ja n -1 3 Ju l- 1 3 Ja n -1 4 Ju l- 1 4 Ja n -1 5 Ju l- 1 5 Ja n -1 6 Ju l- 1 6 Ja n -1 7 Ju l- 1 7 Ja n -1 8 Ju l- 1 8 Ja n -1 9 Ju l- 1 9 Ja n -2 0 Ju l- 2 0 Ja n -2 1 Ju l- 2 1 Ja n -2 2

Capital Flow Real GDP Growth

Figure 4.20: Correlation between capital flow and inflation in Vietnam

Data statistical description

This study collects and arranges a monthly time series of macroeconomic data for the SVAR model Table 4.7 has statistical description details

CBB VIX CF SP IRR FOREX GDP CPI

CBB and CF data are collected in millions of USD Negative CF capital flows represent capital outflows, and positive signs represent capital flows into Vietnam The standard deviation of these two variables is quite high because there is a large difference between the smallest and largest values, while the remaining variables do not have too large standard deviations (see Table 4.7) Besides, 184 observations are suitable for time-series regression and for the research model

Ja n -0 7 Au g -0 7 Ma r-0 8 Oc t-0 8 M ay -0 9 D ec -0 9 Ju l- 1 0 F eb -1 1 Sep- 1 1 Ap r-1 2 No v -1 2 Ju n -1 3 Ja n -1 4 Au g -1 4 Ma r-1 5 Oc t-1 5 M ay -1 6 D ec -1 6 Ju l- 1 7 F eb -1 8 Sep- 1 8 Ap r-1 9 No v -1 9 Ju n -2 0 Ja n -2 1 Au g -2 1

Unit root test results

For the regression model to have reliable estimated results, avoid the phenomenon of fake regression, which needs to perform the unit root testing to consider the stationary or non-stationary variables The standard method applied is Augmented Dickey-Fuller (ADF) The results of the ADF test for unit root are shown in Table 4.8 The results demonstrate that the test statistics are above the critical values, implying that all variables, including CBB, VIX, CF, SP, IRR, GDP, and CPI, are stationary at their current levels, except FOREX, which is stationary at the 1 st difference

Table 4.8: Unit Root Test Result (ADF test)

Variables Level 1 st difference Conclusion

In this study, all variables used to estimate the SVAR model are stationary, so the data series is suitable for regression.

The optimal lag-length selection results

Table 4.9 on lag criteria indicates that lags 3, 11, and 12 are deemed appropriate for SVAR, as suggested by LR, SC, FPE, and HQ criteria However, the models at lags 3 and 12 result in impulse response outcomes that are not statistically significant in several essential variables Hence, the optimal lag length for the chosen model is 11

Table 4.9: Lag order for each model according to selected criteria

Lag LogL LR FPE AIC SC HQ

*Indicates lag order selected by the criterion

SVAR model results

❖ Responses of GDP and CPI to UMP shock and transmission channels

Figure 4.21 depicts the reactions of output and the price index to UMP shocks in the

United States As illustrated in the graph, a shock to the total assets of the Fed balance sheet significantly boosts Vietnam's output and price index However, only the reaction to GDP is meaningful for the ninth month More precisely, an increase in CBB causes a positive and statistically significant increase in GDP in the ninth month following the shock, peaking after roughly ten months at an increase of 4.2 percentage points The reaction of CPI to a shock of

US UMP is similar to the response of GDP when a positive shock to US UMP leads to a steady upward effect on the CPI of Vietnam in the short term, peaks at a 0.3 pp rise, and lasts for around one year However, this response is not statistically significant These findings are consistent with (Anaya et al., 2017; Punzi & Chantapacdepong, 2019), who discovered that prices and production rise after an expansionary monetary policy shock.

Figure 4.21: Responses of GDP and CPI to the US’s UMP shock

The VIX index influences Vietnam's GDP and CPI (Figure 4.22) The findings reveal an adverse reaction of GDP and CPI to a VIX shock A spike in the VIX index implies increased risk aversion, which reduces risk appetite and increases market uncertainty Following the shock, this resulted in a sharp drop in GDP, hitting a five-month high of 3.1 percentage points CPI responds equally negatively, culminating in a 0.26 percent decline The influence on CPI variables becomes considerable from the beginning of the second month through the end of the third month These results are consistent with the literature on risk-taking channels (Yildirim & Ivrendi, 2021) and the changes in risk aversion to output and price index (Tillmann, 2017) It also underlines the significance of risk-taking routes in the international transmission of the United States UMP to Vietnam

Figure 4.22: Responses of GDP and CPI to the VIX shocks

Foreign portfolio flow has a comparable impact on Vietnam's GDP and CPI as the CBB shock (Figure 4.23) Specifically, GDP and CPI are raised after the CF shock, peaking at 2.7 pp, and increasing by 0.64 pp after around nine months and one year, respectively However, the GDP and CPI response to the CF shock are not statistically significant

Figure 4.23: Responses of GDP and CPI to the CF shock

Besides, it is very important regarding capital flows in the transmission (Figure 4.24) The spike in inflows has resulted in a significant boost in Vietnam's market returns The initial response of stock prices in Vietnam has been notably favorable for four months, hitting a peak after four months with an increase of 2.6 percentage points However, SP's response to this shock declines around nine months after the shock, even though it is not statistically significant It implies that the expansion of unconventional monetary policy in the United States resulted in a spike in capital flows to Vietnam, causing the SP variable to rise temporarily These findings show that capital movements are an essential conduit for transmitting US monetary shocks Rey (2016)

Figure 4.24: Responses of equity returns to the CF shocks

❖ Responses of GDP and CPI to domestic shocks

The responses of GDP and CPI variables to a shock to stock price are displayed in Figure 4.25 Although not statistically significant, the results show an upward effect on GDP and CPI after the SP shock It aligns with Tobin's q theory, which states that higher stock prices result in greater output and expenditure

Figure 4.25: Responses of GDP and CPI to the SP shocks

The study finds relatively similar results, shown in Figure 4.26, but only the response of CPI to FOREX shock is statistically significant More specifically, a depreciation of the exchange rate leads to a persistent increase in the price index This result is suitable for a theory about the exchange rate channel proposed by (Mishkin, 2022) According to this, changes in interest rates caused by policy can also impact the exchange rate, resulting in a change in output and inflation The expansion of the US monetary policy leads to a decrease in interest rate (Figure 4.27); it can be explained that when the US applies expansionary monetary policy by implementation of unconventional tools, an inflow will run into Vietnam and stabilize the exchange rate, Vietnam government might adjust the exchange rate via foreign exchange reserve resulting interest rate will be declined

Figure 4.26: Responses of GDP and CPI to the FOREX and IRR shocks

Figure 4.27: Responses of IRR to the US’s UMP shocks

The possible interpretation is that the downward movement of the interest rate in Vietnam reflects a monetary policy reaction to the increase of the US’s UMP Central banks lowered the interest rates in response to the foreign monetary shocks This result is consistent with the findings of (Punzi & Chantapacdepong, 2019)

In summary, the US’s UMP caused a surge in capital inflows to Vietnam via the risk- taking channel and portfolio rebalancing channel, booms in asset prices, and increases in real GDP and price index The expansion of the US monetary policy exerts pressure to reduce interest rates through the intervention of the State Bank of Vietnam This result confirms the existence of the positive responses of Vietnam’s real economy to the expansion of the US monetary policy via unconventional tools, which also proves hypothesis 2: The US’s UMP positively affects the real economy of Vietnamin the global financial crisis and the COVID-

19 pandemic period and explains second research question

Figure 4.28 presents an analysis of the forecast error variance decomposition of GDP

Although not the most significant factors reflecting the change in GDP, CBB, VIX, and CF also account for a high proportion in explaining GDP The VIX variable explains 5.3% of the shift in GDP starting in the tenth month and increases gradually to about 12.9% in the twelfth month CF also explains more significantly, accounting for 3.2% at the beginning and 12.6% in explaining the fluctuation of GDP In addition, CBB explains the change in GDP more clearly The CBB begins to significantly explain a share of 2% of the fluctuation of GDP in the seventh month, peaking at 9.4% in the tenth month and 7.9% in one year.

Figure 4.28: Contribution of the US’s UMP shocks to the forecast variance decomposition of GDP

In Figure 4.29, the contribution of CBB, VIX, and CF shocks to CPI is less significant than their contribution to GDP Although the contribution of CBB shock to the shift of CPI in Vietnam was small in the first month (around 0.3%), this contribution spiked in the next month and peaked in the 5th month at 5.1%, then decreased slightly and maintained around 4% in the following months Overall, shocks to CBB and CF are quite important in explaining the variability of CPI and GDP; however, shocks to VIX seem to be less crucial in this case

CBB VIX CF SP IRR FOREX CPI

Figure 4.29: Contribution of the US’s UMP shocks to the forecast variance decomposition of CPI

SVAR results for the GFC and during pandemic crisis

The study divides the sample into two periods to analyze the responsiveness of GDP and CPI and the extent of the effect of these variables on the UMP shock in the United States during two distinct crisis periods Periods of GFC (2008-2014) and COVID-19 (December

2019 to 2022) The exogenous variable, the number of monthly new confirmed cases of COVID-19, is employed in the pandemic crisis phase to highlight the pandemic's implications, as described in title 3.2

Figure 4.30: The response of GDP to the US’s UMP shock in the period of GFC and during the pandemic crisis

CBB VIX CF SP IRR FOREX GDP

Response of GDP to CBB shock

Figure 4.30 depicts the impact of the US’s UMP shock on GDP across two time periods According to the data, the GDP response to the US’s UMP shock was more significant during the global financial crisis than during the COVID-19 era The magnitude of GDP growth for the US's expansionary monetary policy increases with time, reaching 18.23pp one year after the shock Meanwhile, the reaction of GDP to the Fed's balance sheet expansion shock during the COVID-19 outbreak is half that of the GFC periods, at 7.04pp one year later

Figure 4.31: The response of CPI to the US’s UMP shock in the period of GFC and during the pandemic crisis

In a comparable vein, the effect of the US’s UMP on CPI in Figure 4.31 reveals a difference between the two periods The reaction begins to diverge significantly after the fourth month Specifically, CPI steadily climbed during the GFC in response to the US’s UMP shock, rising from 0.18pp in April to 1.44pp in December Meanwhile, during the epidemic crisis, CPI only grew marginally in the third month following the shock, at 0.17pp, before progressively declining and remaining close to zero in December

Table 4.10: Contribution of CBB shocks to the forecast variance decomposition of

Response of CPI to CBB shock

Based on the Cholesky decomposition, the variance decomposition results support further evidence of the impact of the US’s UMP on Vietnam's real economy during two different crisis periods Table 4.10 compares the contribution of the CBB shock to explaining changes in GDP and CPI in two separate crises The results show that during the GFC period, the contribution of CBB shock to the fluctuation in GDP was more than three times higher than its contribution during the COVID-19 period in the fourth month This ratio gradually decreased in the following months but was still significantly higher

To sum up, it can be seen that during the period of the global financial crisis, the impact of the shock induced by the Fed's balance sheet expansion on the Vietnamese economy was typically more significant than during the COVID-19 pandemic crisis Although the outcomes of this study contradict recent findings for EMEs by Cortes et al

(2022) and Rebucci et al (2022), it contributes more empirical evidence when it comes to an open, small economy and a frontier market.

Robustness test

To test the model's robustness, Wu and Xia's shadow short rate for the US is gathered to substitute total assets on the Fed's balance sheet as a proxy for the US's UMP All procedures and tests for SVAR are done as in previous work in 3.1.2

Wu and Xia's Shadow Short Rate (SSR) is a market-invisible estimate of the short- term interest rate It is generated using a model that integrates data from interest rate term structure and macroeconomic factors The SSR was first introduced by Wu and Xia (2016) The SSR is based on a shadow-rate model, which describes the relationship between observable longer-term bond yields and the unobservable short-term rate the central bank would like to set if not constrained by the zero lower bound (i.e., the lowest possible interest rate) The SSR may be used to assess how monetary policy impacts the general state of the economy when the policy rate is at or near the zero lower limit According to Wu and Xia

(2016), the SSR provides a more exact representation of monetary policy stance than the actual policy rate, which may fail to account for the effects of unconventional monetary policy initiatives such as quantitative easing Thus, SSR is one of the most valuable indicators, along with total assets on the Fed's balance sheet, for investigating the effects of the US’s UMP on foreign nations Understandably, the Fed's expansionary monetary policy via unconventional tools will be reflected in a fall in SSR, and vice versa; hence, the explanation for the SSR variable will be reversed when compared to the reason for the results using the variable CBB

Figure 4.32: Responses of GDP to the SSR, VIX and CF shocks

Although the GDP reaction to SSR and VIX shocks is not statistically significant (Figure 4.32), it does illustrate the negative impact of SSR and VIX on GDP GDP will fall when SSR and VIX induce a spike in shock This result is consistent with the expected sign (Tillmann, 2016; Yildirim & Ivrendi, 2021) Capital inflows boost Vietnam's production GDP rises after the CF shock, peaks at 8.7 percentage points after about six months, then steadily declines and returns to baseline after a year It aligns with the expectation of (Anaya et al., 2017; Punzi & Chantapacdepong, 2019)

Figure 4.33: Responses of CPI to the SSR, VIX and CF shocks

Figure 4.33 depicts the price index's impulsive reaction to several shocks The analysis discovers an adverse reaction of the CPI variable to a shock to the shadow short rate and risk aversion and a positive response of the CPI variable to a shock to capital inflows Notably, the estimated responses show that an increase in shadow rate leads to a persistent negative and statistically significant decrease in CPI at the beginning of the shock In addition, the response of the price index is estimated to be significantly negative for more than seven months after the beginning of the shock, reaching its peak after around seven months at a decrease of 0.33 pp Finally, an increase in capital flows leads to a significant rise to CPI beginning from sixth month after the UMP shocks and reaching a peak at the eleventh month after shock, at an increase of 0.63pp These results are consistent with (Anaya et al., 2017; Gambacorta et al., 2014; Punzi & Chantapacdepong, 2019; Tillmann, 2016) and economic theory on the international transmission of US’s UMP to the rest of the world Further crucially, when utilizing the variable CBB as a proxy for the US's unorthodox monetary policy, these results add further evidence to the research findings

To summarize, both the findings in which the US's UMP is proxied by the total assets of the Fed's balance sheet and the shadow short rate indicate that relaxing monetary conditions in the US leads to an increase in output and the price index in Vietnam They support the dominance of risk-taking and portfolio rebalancing channels in the worldwide spillover effects of the US’s UMP on a small, open economy and a frontier market These analysis and empirical results in both cases are consistent with the recent study of (Anaya et al., 2017; Gambacorta et al., 2014; Punzi & Chantapacdepong, 2019; Tillmann, 2016; Yildirim & Ivrendi, 2021)

Chapter 4 provides an overview of the Vietnamese financial market and real economy from 2000 to 2022 and the research results obtained through the event study method and SVAR model

The event study method is used to examine the reactions of the Vietnamese financial markets with a focus on the stock market and the response of different sectors to the US’s UMP announcements in two periods: the GFC and the COVID-19 pandemic Research results show that Vietnam's stock market reacts positively to information about US'UMP; the reaction is positive on event dates and different event windows The study also found different reactions of the market and separate industries in two periods During the COVID-

19 pandemic, the market tended to react strongly and earlier In addition, the finance and information technology sectors had different responses in the two periods

The SVAR model is used in this chapter to investigate the international spillover effects of the US’s UMP on the Vietnam real economy, focusing on output and price index in this country The impulse response’s function showed that an expansion of the US monetary policy via UMP measures leads to a boom in asset values, increases in real GDP and price index, and a surge in capital inflows to Vietnam via the risk-taking and portfolio rebalancing channels In addition, the expansion of the US monetary policy exerts pressure to reduce interest rates through the intervention of the State Bank of Vietnam The robustness test also contributes the same results when the study replaces the US’s UMP by the shadow short rate proposed by Wu and Xia (2016), and it also helps to support the robustness of the results when considering many different variables represented for the US’s UMP Another significant finding that this study investigates when it comes to the other effects of the US's UMP during the GFC period and the pandemic crisis is that the shock caused by the FED's balance sheet growth during the GFC period usually had a more significant negative effect on the Vietnamese economy than it did during the pandemic crisis

The preceding findings are the foundation for policy implications discussed in the next chapter.

CONCLUSION

Research question 1: Does the Vietnamese financial market react to the US’s

announcements in the global financial crisis and the COVID-19 pandemic period?

To investigate the research question above, this research is based on the literature review presented in Chapter 2; the event study method is employed to scrutinize the immediate responses of the stock market to the official announcements regarding the US's UMP during both the global financial crisis and the COVID-19 pandemic Event dates are based on Fed announcements related to the research of (Bowman et al., 2015) and (Clarida et al., 2021); adjusted stock price and market index data obtained from HOSE The study considers the aggregate results of all listed stocks to represent the market in two periods In addition, this study also provides a detailed analysis of each sector Non-parametric and parametric tests were used to test the statistical significance of the research results

The research results indicate that the Vietnamese stock market positively reacts to the information about the US's UMP with short event windows This result holds for most different sectors Specifically, the reaction was clear on the event date when the AAR of the market and the AAR of various sectors were positive on this day; the statistically significant results (both parametric and non-parametric paramedic tests) for the market and some sectors The AAR and CAAR of the market after the event date remain positive In addition, AAR and CAAR are positive for most sectors

The research results also show that the market has a positive reaction on the day of the UMP event; specifically, the AAR of the market during the GFC period is 0.16% and during the COVID-19 pandemic period is 0.19% (statistically significant results at 1% significance level), for the whole period, the AAR is 0.18% The AAR that remains positive for the days after the event date is 0.01% - 0.26% (GFC period), 0.03% - 0.15% (COVID-19 period) and 0.09% - 0.12% (two periods) This positive result is also accurate for the CAAR of event windows ([0;+1]; [0;+2] [0;+3]) of the range from 0.13% to 0.50% (GFC period), 0.22% - 0.36 % (COVID-19 period) and 0.27% - 0.39% (two periods)

For different sectors, the study results show that there is still positive AAR on the event day, the days after the event date, and within the event windows The positive ARR of sectors ranges from 0.02% to 0.36% (GFC period) and from -0.16% to 0.37% (COVID-19 period) CARR from the event date to day +3 (window events [0;+1]; [0;+2] [0;+3]) of sectors remained positive with different CAAR values where the most prominent positive CAAR is 0.96% (for the Energy sector), and the most minor positive is 0.04% The trend in the value of CAAR of all sectors continued during the COVID-19 period when the positive CAAR for event windows after the event date ranged from 0.07% to 0.90%

They use a different model to identify abnormal returns, specifically the market- adjusted model The results indicate that there is not much difference in the trends of AAR and CAAR This robustness test also strengthens the preceding results The research results also affirm the effectiveness of the Vietnamese stock market in response to the information related to the US’s UMP.

Research question 1: Does the real economy of Vietnam respond to the US’s

shocks in the global financial crisis and the COVID-19 pandemic period?

To investigate the research question above, this research is based on the literature review presented in Chapter 2; this study used the SVAR model with eight variables, including CBB, VIX, CF, SP, IRR, FOREX, GDP, and CPI

Due to the lag eight and estimating SVAR model, the impulse response functions showed the first main findings of this study: An expansionary monetary policy by unconventional measures leads to an increase in Vietnam's output, and price indexes have increased significantly In contrast, only the GDP response has increased dramatically for the nine months However, the response of GDP to a change in CBB is more robust than that of the CPI Furthermore, risk aversion has an influence on GDP and CPI in Vietnam A surge in the VIX index signals increased risk aversion, leading to a quick drop in GDP following the shock, reaching its peak after five months The response of CPI is similarly negative; it becomes significant from the beginning of the second month until the third month after the shock The variance decomposition also found that besides shock to itself, shocks to VIX are not completely important in explaining the variability of CPI and GDP only in the first two months Still, it is essential in the following periods to one year

In addition, although the impact of foreign capital inflows on GDP and CPI is not statistically significant, the results also suggest that an upward shock of this capital inflow causes stock prices to increase sharply immediately after the shock It implies that the expansion of unconventional monetary policy in the United States resulted in a spike in capital flows to Vietnam, causing the SP variable to rise temporarily This conclusion demonstrates the significance of capital flows as a primary route for the transmission of US monetary shocks and the indirect rise in GDP caused by an increase in capital inflows into the Vietnamese stock market

Another finding is that besides being influenced by external variables, the price index in Vietnam is also affected by foreign exchange rates More specifically, a depreciation of the exchange rate leads to a persistent increase in the price index This result can be explained through the intervention of the State Bank of Vietnam due to the expansion of the US monetary policy When the US implements UMP as part of its expansionary monetary policy, foreign capital will flow into Vietnam To stabilize the exchange rate, the Vietnamese government can adjust the exchange rate by using foreign exchange reserves, leading to a depreciation in local currency, which will lower interest rates and benefit the price index and GDP These results are consistent with the theory presented in Chapter 2 and empirical studies on the impacts of the US’s UMP on the rest of the world

The robustness check strengthens the preceding results Using Wu and Xia's shadow short rate for the US as a proxy for the US's UMP, the GDP and CPI reaction results to the UMP shock are similar to the conclusions calculated using total assets on the Fed's balance sheet Precisely, an increase in shadow short rate reflects a contractionary monetary policy in the US, leading to a persistent negative and statistically significant decrease in CPI at the beginning of the shock and a damaging decline in Vietnam's GDP.

Research Question 3: Do differences exist between the effects of the US’s

Vietnamese financial market and real economy between the global financial crisis and the pandemic crisis?

5.1.3.1 The differences in the financial market

Before utilizing the US's UMP during the two crisis periods, the reaction of the Vietnamese financial market also exhibited some differences These differences manifest in timing, trends, and the extent of the market response During the COVID-19 period, the market reacted earlier than the announcement of the US’s UMP, whereas in the GFC period, the market responded immediately to the US’s UMP information, and the upward trend lasted longer than the GFC period Specifically, during the GFC period, the market showed an uptrend from the event date onwards; the upward trend is evident from day 0 until day +5 The increase in the market during the COVID-19 period was more significant than that of the GFC period Meanwhile, during the COVID-19 pandemic, the bullish impulse appeared before the event date and continued to remain after the event date The market's upward trend during this period starts from day -5 and concludes on day +3

Considering the separate sectors, the sectors related to the US's UMP have different responses in the two periods Specifically, during the financial crisis period, the finance sector had the lowest response in terms of AAR and CAAR compared to other sectors, while during the COVID-19 period, this was the sector with the best performance The others, such as real estate, industrials, materials, and sectors during the COVID-19 pandemic, responded much more positively than during the GFC period The information technology sector during the COVID-19 pandemic had a better trend of AAR and CAAR from the date of the event onward At the same time, in the GFC period, the results were the opposite The results are similar for the healthcare sector, which is relevant because these sectors benefited the most during the COVID-19 pandemic

5.1.3.2 The differences in real economy

This study used the SVAR model with eight variables, including CBB, VIX, CF, SP, IRR, FOREX, GDP, and CPI, to compare the response of GDP and CPI as well as the level of impact on these variables to the US’s UMP shock in different crisis periods By dividing the sample into two distinct periods: the Global Financial Crisis (GFC) period (2008-2014) and the pandemic crisis period (December 2019 to present) combined with the exogenous variable, which proxy for the number of monthly new confirmed cases of COVID-19, the results indicated that the impact of the shock caused by the expansion of the Fed's balance sheet on the Vietnamese economy in GFC was generally two times higher than during the epidemic crisis

Although the results are inconsistent with recent findings for EMEs, they also have relevance to the situation in Vietnam and across the world during the COVID-19 pandemic crisis, as seen below To begin with, the global financial crisis was more severe and persistent than the COVID-19 catastrophe The worldwide economic activity was significantly reduced because of the financial crisis, with many nations enduring a recession The COVID-19 crisis also led to a global recession, but the downturn was not as severe or long-lasting as the financial crisis As a result of the severity and duration of the global financial crisis, the influence of US monetary policy on other nations may have been higher Second, the financial crisis was a financial catastrophe that began in the US housing market and expanded to the global financial system In contrast, the COVID-19 problem was a health crisis that resulted in a severe decline in economic activity due to lockdowns and other limitations

The nature of the crises may have influenced how US monetary policy was transmitted to other nations, with the financial crisis causing more broad financial stress and spillovers than the COVID-19 issue Finally, other nations' reactions to the global financial crisis and the COVID-19 situation may have varied, influencing the transmission of US monetary policy Many nations employed expansionary monetary and fiscal policies to offset the effects of the financial crisis, which may have exacerbated the transmission of US monetary policy Many nations used expansionary policies during the COVID-19 crisis, although the response was more variable and less coordinated than during the financial crisis periods.

RESEARCH CONTRIBUTIONS

The results of the study help to make critical academic contributions

First, this study makes an essential contribution to the addition of empirical evidence when examining the instant responses of Vietnamese financial markers, which focus on the stock market Vietnam is a small country with an open economy in the frontier market Research results show that the market reacts to external information from developed countries, such as the US, with the most significant global influence As far as it could be ascertained, this is one of the few studies looking at the effects of the US monetary policy by using UMP tools on the financial market for a frontier market like Vietnam Moreover, a detailed analysis of the impact on different sectors is also essential to this research

Second, this study contributes to the literature and evidence comparing the differences between the effects of the US’s UMP in the GFC and during the pandemic crisis By dividing the sample into two different periods, including the GFC period and the COVID-19 period, the research indicated the similarities and differences between the market and other sectors of the Vietnamese stock market before the announcement of the US’s UMP

Third, this study contributes significantly to the literature on unconventional monetary policy spillover effects and international transmission channels The results for research question 2 provide more evidence for a small, open country and frontier market, that is, the positive response of output and price index to a US’s UMP shock Thus, as far as it could be ascertained, this is one of the few studies looking at the effects of the US monetary policy by using UMP tools on the real economy of a frontier market like Vietnam

Fourth, this study also contributes to the literature and evidence comparing the differences between the effects of COVID-19 in the GFC and during the pandemic crisis By dividing the sample into two different periods, including the GFC period and the pandemic crisis period, the results indicated that the impact of the shock caused by the expansion of the Fed's balance sheet on the Vietnamese economy was generally two times higher than during the epidemic crisis

Lastly, although this is not the focus of this study, the additional results in section 4.3.6 also contribute to the literature on international monetary policy transmission channels These results indicated that risk-taking and portfolio rebalancing channels are critical in transmitting global monetary policy to Vietnam It also showed that managing Vietnam's monetary policy through the exchange rate channel is flexible Especially when there is a wave of foreign capital inflows into Vietnam, this is suitable for a country like Vietnam with a regulated floating exchange rate regime

In terms of method, this research provides several improvements on previous studies

It examines the results (related to research question 2) with various measurement factors for the US’s UMP to ensure the model's robustness, including the total asset of the Fed's balance sheet and shadow short rate introduced by (Wu & Xia, 2016, 2020) The use of such different elements as a proxy for the US’s unconventional monetary policy is essential because the only use of one factor, such as the total asset of the Fed's balance sheet, might be subject to criticism, such as it is not suitable to some extent to proxy for UMP Implementing traditional monetary policy also expanded the Fed's balance sheet; therefore, it is not easy to determine when UMP is a conventional monetary policy Therefore, this study must use another factor, the shadow short rate measured by (Wu & Xia, 2016, 2020) for the US (SSR), reflecting different stances of monetary policies in this country In addition, this study has contributed to using exogenous variables proxy for the number of monthly new confirmed cases of COVID-19 Using such variables helps emphasize the phase of the pandemic crisis, which is very different from the previous crises, as well as clarifying the impacts of the pandemic crisis on the economy in the research period

The policy implications of this study are discussed in the following part with references to the findings.

POLICY IMPLICATIONS

Constructing and implementing unconventional monetary policies suitable

Unconventional monetary policies are typically employed during periods of crisis when conventional monetary policy tools become impractical, particularly in situations of near-zero policy interest rates This can lead to a decrease in the general interest rate, a phenomenon observed in Japan over several decades Bernanke (2022) attributed this trend to a long-term decline in the average level of interest rates This decline is partly due to lower inflation, resulting in a general level of interest rates that is much lower than in the past, even when monetary policy is not stimulating the economy This significantly reduces the ability of the Federal Reserve and other central banks to cut interest rates to bolster the economy during downturns This is particularly relevant in the context of the current global economy, which is fraught with uncertainties Consequently, it is imperative to research and prepare the necessary conditions for Vietnam to implement unconventional monetary policies in the future To do this, regulatory agencies need to prepare for the following tasks:

Firstly, develop the financial instrument market to lay the groundwork for quantitative easing One of the strategies employed by the State Bank of Vietnam to regulate the money supply involves open market operations, with the assets traded being bills and government bonds In certain instances, the State Bank has issued its own bills These instruments are safe and highly liquid; however, in the context of unconventional monetary policy, the central bank purchases assets (bonds) from financial institutions and businesses These assets carry a higher risk than those issued by the government According to Nguyễn and Hồ (2020), Vietnam has not yet utilized this instrument to regulate unconventional monetary policy alongside conventional economic policies The primary reason is the development of the financial system, specifically, the stock market Consequently, regulatory agencies need to foster a large, transparent financial market for high-quality financial products issued by reputable domestic organizations To achieve this, the following tasks must be undertaken:

(i) Establish a robust regulatory framework that ensures transparency, protects investors, and maintains market integrity This could encompass regulations on disclosure requirements, trading practices, and market abuse (ii) Develop a reliable and efficient market infrastructure, which includes trading platforms, clearing and settlement systems, and depositories (iii) Encourage the diversification of financial instruments Offering a wide array of instruments such as government bonds, corporate bonds, municipal bonds, and commercial papers can attract a more diverse investor base (iv) Promote financial literacy among potential investors Understanding the benefits and risks of different financial instruments is crucial for market development These are the essential foundations for Vietnam to be able to implement quantitative easing tools when necessary

Secondly, enhance forward guidance tools, especially commitments on interest rates, to maintain public confidence (such as investors' businesses) Forward guidance tools are implemented through the central bank’s announcements about intentions in the future monetary policy These policy orientations will majorly impact the public’s long-term interest rate expectations, thereby affecting investment and consumption trends For many years, the State Bank of Vietnam has also implemented Forward guidance through two important policies: (i) credit growth (the State Bank assigns credit growth limits to commercial banks) and (ii) stabilizing the exchange rate (giving a message about the exchange rate between USD/VND) Regarding interest rates, it still depends a lot on the supply and demand of capital in the market

To implement forward guidance tools, SBV must conduct the following tasks: (i) SBV should strive to build and maintain credibility This tool will be ineffective if market participants do not believe the central bank will follow through on its forward guidance (ii) SBV should provide clear and concise information about its future policy intentions This can reduce uncertainty and help market participants make informed decisions (iii) SBV should ensure its forward guidance is consistent with its other communications and actions Inconsistent messages can confuse market participants and undermine the effectiveness of forward guidance (iv) SBV should be transparent about its monitoring of economic indicators and how they will influence future policy decisions, and (v) while providing clear guidance is essential, the central bank should also retain some flexibility to adjust its policy as economic conditions change

Finally, the State Bank of Vietnam always ensures the role of expansion of lender of last resort facilities in any context This is a vital role of central banks in any crisis In the context of the COVID-19 pandemic, the State Bank of Vietnam has also performed this role well by continuously adjusting to reduce operating interest rates such as refinancing interest rates or discount rates, ceiling savings interest rates to contribute to lowering lending interest rates of credit institutions for customers In addition to reducing operating interest rates, on August 6, 2020, the State Bank also announced a reduction in the compulsory reserve deposit interest rate of credit institutions; on March 13, 2020, the State Bank issued Circular No 01/2020/TT-NHNN on credit institutions, foreign bank branches restructuring the debt repayment term, exempting, reducing interest, fees, keeping the same debt group to support customers affected by the COVID-19 epidemic These decisions in the context of the epidemic have helped to create conditions for credit institutions to support businesses and individuals affected by the epidemic to access cheap capital through lowering lending interest rates and reducing financial burdens, as well as improving and maintaining the business production activities of businesses.

Developing the financial market to increase the attraction of foreign

The empirical findings from this study shed light on the Vietnamese financial market, particularly the stock market, in response to announcements made by the United States, exhibits a semi-strong form of the efficient market hypothesis This means that the stock prices reflect not only the historical information, but also the publicly available information, such as the official statements of the Fed regarding its UMP actions Moreover, the study reveals that the Fed’s balance sheet (CBB) shocks, which capture the unexpected changes in the Fed’s balance sheet due to its forward guidance, have a positive effect on the foreign capital inflows into Vietnam This implies that the US’s influences the cross-border portfolio allocation decisions of foreign investors Therefore, with the most significant weight in the MSCI’s frontier market index basket and expectations being raised to the emerging market group shortly Vietnam needs to accelerate the process of upgrading the market such as:

Transparency: Enhancing transparency is crucial Vietnam should ensure that financial information, corporate disclosures, and market data are readily accessible to investors Clear reporting standards and timely dissemination of relevant information build investor confidence

Investor Rights Protection: Strengthening investor protection mechanisms is essential This involves enforcing laws that safeguard shareholders’ rights, prevent insider trading, and promote fair treatment of all investors

Market manipulation enforcement: Rigorous enforcement of market manipulation is vital Regulatory bodies should actively monitor trading activities, investigate irregularities, and impose penalties on violators A robust legal framework is necessary to maintain market integrity

(ii) Improving foreign investor accessibility

Lifting restrictions on foreign ownership: Removing or relaxing restrictions on foreign ownership of Vietnamese companies encourages foreign capital inflows Investors seek opportunities where they can participate meaningfully in a company’s growth

Streamlining capital flows: Simplifying administrative procedures for foreign investment facilitates capital inflows Efficient processes for remittances, repatriation, and currency conversion enhance investor confidence

Trading systems: Upgrading trading platforms ensures seamless execution of orders Faster order matching, reduced latency, and improved liquidity attract both domestic and foreign investors

Clearing and settlement systems: Efficient clearing and settlement processes minimize transaction risks Real-time settlement, automated reconciliation, and secure custody services enhance market efficiency.

Monitoring the US’s monetary policy and adjusting its policy to respond to

The main research findings showed that Vietnam's output and price index are closely correlated with the conduct of the US’s UMP, so the importance of closely monitoring and responding to global economic developments when making domestic policy decisions should be emphasized Policymakers must carefully balance the benefits of expansionary monetary policy with the potential risks of inflation and exchange rate volatility while also working to promote long-term economic growth and stability More specifically, the policy recommendations for the State Bank of Vietnam and the government are as follows:

Firstly, the Vietnamese government and the State Bank of Vietnam should closely monitor the monetary policy decisions of the Federal Reserve and adjust their policies accordingly Additionally, it is crucial for the Vietnamese government and the State Bank of Vietnam to collaborate closely with other international financial institutions, such as the International Monetary Fund (IMF) and the World Bank, to exchange information and best practices By doing so, Vietnam can stay informed about global economic trends and adapt its monetary policies accordingly Furthermore, the State Bank of Vietnam should consider implementing targeted measures to support specific sectors of the economy, such as providing low-interest loans to small and medium-sized enterprises (SMEs) or offering incentives for investment in high-tech industries These efforts would contribute to a more resilient and diversified Vietnamese economy

Secondly, the State Bank of Vietnam should closely monitor inflation rates to ensure that the expansionary monetary policy does not lead to a sustained price increase If inflation becomes a concern, the central bank may need to adjust its monetary policy stance to prevent further price increases Moreover, it is essential for the State Bank of Vietnam to engage in regular dialogue with experts, economists, and industry leaders to assess the impact of inflation on various sectors By maintaining an open and transparent communication channel, the central bank can make informed decisions that benefit the overall economy

Finally, to reduce the vulnerability of the Vietnamese economy to external shocks, the

Vietnamese government should work to diversify its economy This could involve promoting domestic industries and increasing trade with other countries However, diversification should not be limited to traditional sectors alone The government should actively explore emerging industries, invest in research and development, and foster innovation By creating an ecosystem that encourages entrepreneurship and technological advancements, Vietnam can enhance its economic resilience and adaptability Additionally, the government should prioritize sustainable development and environmental protection, as these factors play a crucial role in ensuring long-term economic stability By investing in renewable energy sources, promoting eco-friendly practices, and safeguarding natural resources, Vietnam can further enhance its economic prospects and reduce dependence on external factors.

Focus on managing the potential risks of foreign capital flows and market

The research results showed that the implementation of the US's UMP would increase capital flows into Vietnam, which would contribute to increasing asset prices Faced with this opportunity to attract foreign capital, the State Bank of Vietnam should closely track foreign capital inflows, recognize the vital role that capital flows play in the transmission of monetary shocks, and implement policies to manage potential risks associated with these flows, such as exchange rate volatility, because the research results showed that the expansion of UMP in the US led to a surge in capital flows to Vietnam In addition, with the surge of portfolio capital inflows to Vietnam, the Vietnamese government may need to consider implementing policies to encourage more long-term, stable foreign investment in the country rather than short-term speculative investment that can lead to market instability This could involve implementing policies to support domestic industries and increase access to credit for small and medium-sized enterprises, which can help to attract more long-term investors In addition, the State Securities Commission of Vietnam should continue to promote policies that support the development of the stock market, such as improving market transparency, promoting good corporate governance, and reducing barriers to entry A well- functioning stock market can attract more long-term investors and help to promote economic growth Besides, the Vietnamese government and the State Securities Commission may need to implement targeted policies to support individual investors negatively affected by market volatility resulting from capital flows This could include measures to protect small investors from market risks or policies encouraging more diversified investment portfolios

Moreover, the State Bank of Vietnam should continue to monitor inflation rates closely and adjust monetary policy accordingly The indirect increase of GDP through the increase in capital inflow into the Vietnamese stock market can lead to inflationary pressures, and the central bank may need to implement policy measures to prevent sustained price increases

Overall, due to the importance of managing the potential risks associated with foreign capital flows and market volatility while also working to promote long-term economic growth and stability, policymakers must carefully balance the benefits of foreign investment with the potential risks to ensure that the Vietnamese economy remains resilient and sustainable over the long term.

Building resilience and promoting economic self-sufficiency in the face of

In the context of an increasingly interconnected global economy, the Vietnamese government must proactively address the challenges posed by external shocks These shocks can take various forms, including financial crises, pandemics, or sudden shifts in international trade dynamics To build resilience and promote economic self-sufficiency,

Vietnam should adopt a multifaceted approach that encompasses both short-term measures and long-term strategies

Firstly, the Vietnamese government should recognize the importance of building resilience This involves not only reacting to crises but also proactively preparing for them

By closely monitoring global economic trends and collaborating with international organizations, such as the World Trade Organization (WTO) and the Asia-Pacific Economic Cooperation (APEC), Vietnam can stay informed about potential risks and vulnerabilities Additionally, the government should establish a dedicated task force responsible for assessing and mitigating external shocks This task force would work closely with relevant ministries, research institutions, and industry experts to develop contingency plans and implement timely interventions

Secondly, policies that support domestic industries are crucial The Vietnamese government should prioritize sectors that contribute significantly to the country’s GDP and employment For instance, investing in healthcare infrastructure and medical research can enhance the nation’s ability to respond to health-related crises Similarly, promoting innovation and technological development across various industries—such as agriculture, manufacturing, and services—will foster economic diversification and reduce reliance on a few vulnerable sectors By providing targeted incentives, tax breaks, and research grants, the government can encourage private enterprises and startups to drive innovation and create new economic opportunities

Thirdly, improving access to credit for small and medium-sized enterprises (SMEs) is essential SMEs play a vital role in the Vietnamese economy, but they often face challenges in securing financing The government should collaborate with financial institutions to design flexible credit programs tailored to SMEs’ needs These programs could include low- interest loans, credit guarantees, and capacity-building initiatives By empowering SMEs, Vietnam can enhance its economic resilience and create a more inclusive and dynamic business environment

Fourthly, diversification remains a key strategy While traditional sectors like manufacturing and tourism contribute significantly to Vietnam’s economy, overreliance on them can be risky The government should actively explore emerging sectors, such as renewable energy, biotechnology, and digital services Investing in research and development, supporting startups, and facilitating technology transfer will accelerate the transition toward a more diversified economy Moreover, cross-sectoral collaboration— where industries share knowledge and resources—can lead to innovative solutions and new growth opportunities

In addition, the State Bank of Vietnam should continue to monitor inflation rates closely and swift adjustments to monetary policy are crucial to prevent sustained price increases The higher response of the Vietnamese economy to the global financial crisis highlights the need for the central bank to remain vigilant and ready to take action to prevent sustained price increases.

Investors consider selecting investment opportunities in the context of

In the ever-evolving landscape of global financial markets, investors face a complex web of factors that influence their investment decisions Among these, monetary policy fluctuations play a pivotal role Let’s delve into several investment strategies that investors should consider in response to significant changes in monetary policy with research results, when developing countries implement UMP, investors can consider investment opportunities such as:

(i) Investing in stocks less affected by market During times of heightened market volatility, investors seek refuge in defensive stocks These stocks belong to sectors that tend to be less sensitive to economic cycles and market swings Examples include healthcare companies, consumer staples, and utility providers By allocating a portion of their portfolio to defensive stocks, investors can mitigate risk during uncertain times

(ii) When FED implement UMP, such as quantitative easing or negative interest rates, investors can capitalize on specific opportunities like immediate market boost or long-term trends Expansive monetary policy announcements often lead to an initial surge in stock markets Investors should closely monitor policy statements and act swiftly to take advantage of this upward momentum While the immediate impact is significant, expansive policies can sustain market growth over an extended period Investors must set clear profit targets and exit points to optimize their gains

(iii) Consider the trend of foreign capital flows into the stock market to choose the holding period The flow of foreign capital into frontier markets significantly influences stock prices When foreign investment pours into the Vietnamese stock market, it tends to drive prices higher Investors may choose longer holding periods during such inflow phases

Conversely, if foreign capital reverses out of Vietnam due to global uncertainties or local factors, investors should reevaluate their portfolio allocation Reducing exposure to stocks during capital flight can protect against losses If the capital flow reverses out of Vietnam, consider reducing the proportion of stocks in the investment portfolio

(iv) Monitor changes in domestic monetary policy While global monetary policies impact all markets, domestic monetary policy decisions have a rapid and pronounced effect on local exchanges Investors should closely track changes in Vietnam’s central bank policies, interest rates, and liquidity measures For example, A sudden rate hike or cut can trigger market reactions Investors should anticipate such moves and adjust their portfolios accordingly The State Bank of Vietnam’s liquidity injections or withdrawals can influence market sentiment Investors should stay informed about liquidity conditions.Changes in the Vietnamese dong’s exchange rate can impact export-oriented companies and foreign investors Hedging strategies may be necessary.

LIMITATIONS AND SUGGESTIONS FOR FURTHER RESEARCH

Although the study raised questions about research hypotheses and used proper research methods to solve the above problems, this study still has certain limitations

First, the study only considers the stock market without an in-depth analysis of the bond and foreign exchange markets It focuses on the Vietnamese stock market, not expanding the comparison with other countries Besides, the calculation of the expected return of the stock is only based on the popular model like the market and risk-adjusted model or market-adjusted model, not using more complex models such as CAPM, Fama-French to analyze more closely the difference in business size as well as other factors affecting the profitability of stocks

Second, as mentioned above, the US is a country that has a significant influence on the global economy; the remaining developed countries also have specific roles This study only considers the impact of the US’s UMP on the Vietnamese stock market, not considering the UMP policies of other countries or regions such as the European Union, the UK, or Japan

Third, the object of this research is open economy, small and frontier markets

Although Vietnam is the only country in Southeast Asia that satisfies this condition, to make the study more comprehensive and the results more convincing, the analysis should be extended to more countries that are frontier markets in Asia or the world These countries should have similar macroeconomic situations and monetary policy management

Finally, data from 2007 to 2022 were used to conduct this research Even though there was sufficient time for time series in monthly data for SVAR models, more data would be more beneficial for the findings Due to Vietnam's statistical issues, it has been difficult for this study to gather all necessary statistics with high reliability

The limitations of the study also suggest suggestions for future research, such as expanding into the bond and foreign exchange markets, using more complex models to determine the expected returns of stocks, and expanding the scope of research in other countries

Chapter 5 provides the conclusions and policy implications of the research on the spillover effects of the US's UMP on Vietnam's financial market and the real economy The significant findings are as follows: (i) The Vietnamese stock market positively reacts to the US’s UMP announcements, and the market's responses during the GFC and COVID-19 pandemic have some differences, with varying sector performances (ii) Expansionary UMP in the US positively affects Vietnam's output and price indexes, particularly GDP and CPI The impact on GDP is more substantial than on CPI, and risk aversion influences both indicators Capital inflows resulting from the US's UMP also caused a temporary rise in Vietnam's stock prices Regarding the differences in spillover effects during the Global Financial Crisis (GFC) and the COVID-19 pandemic, the study found that the impact of UMP on Vietnam was generally two times higher during the GFC

The research contributes to empirical evidence on the instant response of the stock market reactions It compares the effects of crises and the literature on UMP spillover effects on small, open, and frontier markets like Vietnam Highlights the importance of monitoring global economic developments and managing risks associated with foreign capital flows and market volatility

Policy implications include monitoring the US and developing countries' macro policies, implementing UMP tools for market confidence, and attracting foreign investment Limitations involve focusing on the stock market and suggesting future research to consider other markets and complex models Expansionary UMP in the US positively affects Vietnam's output and price indexes, particularly GDP and CPI The impact on GDP is more substantial than on CPI, and risk aversion influences both indicators Vietnam's stock prices

Furthermore, there is room for further research to explore other transmission channels and extend the study to more frontier markets in Asia or globally

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