the impact of monetary policy on vietnamese stock market

Thesepolicies are developed by the central bank or a comparable regulatory entity.The relationship between monetary policy and the stock market has attracted moreand more attention from

FOREIGN TRADE UNIVERSITY

FACULTY OF INTERNATIONAL ECONOMICS

Module: Econometrics 1Major: International Economics

THE IMPACT OF MONETARY POLICY ON VIETNAMESE STOCK MARKET

Instructor PhD Dinh Thi Thanh Binh

Hanoi, September 2023

TABLE OF CONTENTS

CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW 5

2.1.3 Monetary instruments used by the state to change stock price indexes 6

3.2.1 Data source 14

3.3.3 Correlation matrix between variables and interpretations 16

4.1.1 Testing the overall significance level of model 184.1.2 Testing the significance level of each independent variable 18

CHAPTER 1: INTRODUCTION

1.1 Introduction

The stock market refers to public marketplaces for the issuance, purchase, and sale ofstocks that trade on a stock exchange or over-the-counter Stocks, also known as equities,reflect a company's fractional ownership, and the stock market is a marketplace whereinvestors may purchase and sell ownership of such investable assets A well-functioningstock market is considered vital to economic development because it allows enterprises

to swiftly acquire funds from the general public The stock market serves two functions:the first is to provide cash for firms to fund and develop their operations, and the second

is to provide investors with the chance to partake in the earnings of publicly listedcompanies

However, there are studies that show the stock market is affected by monetarypolicy Monetary policy is an economic policy that governs the quantity and pace ofexpansion of an economy's money supply It is an effective instrument for controllingmacroeconomic factors such as inflation and unemployment These policies are achievedthrough many mechanisms, including as interest rate adjustments, the purchase or sale ofgovernment assets, and changes in the quantity of cash circulating in the economy Thesepolicies are developed by the central bank or a comparable regulatory entity

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

In this research, we will largely focus on the effect of monetary policy on thestock market in the Vietnamese market from 2018 to June 2023 in order to acquire amore comprehensive picture of our sector The research will investigate the impact of

monetary policy on the stock market using two variables: interest rates and moneysupply There are two more external issues to consider: inflation and exchange rate.1.2 Objectives of the study

This study aims to analyze and evaluate the impact of monetary policy (two tools:money supply, and interest rate) changes on Vietnam's stock market in the period of timefrom 2018 to June 2023 The objective of the study will be concretized into the followingresearch question: "How will the change in monetary policy in Vietnam affect theVietnamese stock market?"

1.3 Subjects and scope of the study

1.5 The layout of the topic

The structure of the thesis consists of five chapters:

Chapter 1: Introduction

Chapter 2: Theoretical framework and literature review

Chapter 3: Research Methodology

Chapter 4: Test results and discussions

a stable exchange rate, economic growth or impact on the stock market, real estate, etc.2.1.2 Stock price index

Stock price index is a stock quote index that reflects the development trend of thestock market, and shows the changing trend of stock prices and the trading situation inthe market Simply, a stock price index is the average price of a stock at a given daterelative to the base date (Nguyen Minh Kieu and Bui Kim Yen, 2009) In Vietnam, thereare many different stock market indexes such as VN-Index, VN30, HNX-Index, HNX30,UPCOM, VNAllShare We all know that HOSE is the largest stock exchange in Vietnambut recently, the trend is that many businesses listed on HOSE are moving to HNX Thereason for the phenomenon of stock transfer from HOSE to HNX is:

- HoSE has a large daily trading volume, causing system congestion Recently,when the trading value on HOSE reached the threshold of 12,000 billion, therewas a phenomenon of order congestion, blocking operations and opportunities forinvestors

- Prolonged congestion affects the rights of investors when making transactions.Therefore, some businesses tend to switch from HOSE to HNX to reduce load

HNX stock exchange is a reliable and reputable address that many investorschoose to do business with when participating in the market.

HNX-Index is calculated according to the formula:

resulting in an increase in stock prices Nguyen and Nguyen (2013) also looked into andagreed that money supply and the stock market had a beneficial link Because of theimpact of monetary policy, when the money supply expands, surplus liquidity will have asignificant impact on the stock market In the case of an expansionary monetary policy,the economy's interest rate falls, which lowers the discount rate on assets, raising theprojected price and increasing revenue Higher interest rates, in the case of tightmonetary policy, raise the discount rate in the valuation model, making fixed incomeassets more appealing, reducing stock liquidity, and lowering the desire to borrow.Borrowing to invest in securities and, as a result, hurting company profitability, as well asthe effect of falling stock prices Rahman, Sidek, and Tafri (2009), as well as Rozeff(1974), found that monetary policy has a considerable impact on stock return growth.Maysami and Koh (2000) add that the money supply and the SGX index (SingaporeStock Exchange Index) have a positive relationship.

Inflation

Inflation is the persistent increase in the general price level of goods and servicesover time and the loss of value of a currency When the general price level rises, a unit ofcurrency buys fewer goods and services than in the past, so inflation reflects a decrease

in purchasing power per unit of currency And the Consumer Price Index (CPI) is used asthe basis for calculating inflation

Most of the experimental research results in Vietnam show that inflation and stockprice index have a negative relationship Indeed, looking at the HNX-Index chart inVietnam from 2006 to now, it can be seen that in 2008 the CPI reached its highest level,the stock market peaked and fell into a downward shock cycle Other years with high CPIalso sent the stock market down

This can be explained by two reasons Firstly, the higher the inflation, the fasterthe value of the currency will go down, making people tend to hold assets that are lessdepreciated like gold, real estate, instead of investing in other channels with highliquidity such as stocks, bonds or bank deposits At that time, the demand in the stockmarket decreased while the supply remained the same, causing the stock market price todecrease In addition, inflation also indirectly affects the stock market through productionand business results of enterprises Specifically, inflation causes input costs of enterprises

to increase, leading to higher prices of final products sold than before to ensure thatenterprises still have guaranteed revenue for production activities However, if the price

of a good is too high, consumers will switch to other cheaper substitutes This leads to adecrease in both sales volume and expected profit of the business, making the businessless attractive in the eyes of investors Ultimately, this would lead to a market failure Ingeneral, high inflation is often considered a negative signal for the stock market because

it causes borrowing costs, input costs (raw materials, labor) to increase, as well as reducepeople's living standards

Interest Rate

Research by Bui Kim Yen and Nguyen Thai Son (2014) when using the VECMmodel, Dang Thi Quynh Anh (2018) when applying the VAR model and other studies

within Vietnam have shown that interest rates have negatively affected the stock priceindex Specifically, when interest rates increase, individual customers will be affectedthrough increased interest rates on credit cards and other short-term loans At the sametime, individuals may also limit their debt levels, so consumers will now have less money

to spend As a consequence, this will entail a decline in consumer consumption ofbusinesses' goods In addition, businesses themselves also need to borrow money fromcommercial banks to maintain operations and expand production Once loans from banksbecome more expensive, businesses will be reluctant to borrow money because they have

to pay a higher interest rate up front for the corresponding loans For a business in agrowth period, this can have a serious impact, causing the business to narrow its scope ofoperations and, as a result, reduce profits Once a business is seen by the market ascutting growth investment costs or is making less profit because of rising debt costs ordeclining sales due to consumers, the future money is expected to decrease and of course,the share price of the business will go down If the number of businesses on the stockmarket that has this decline is large enough, then considering the entire market, the stockmarket index will decrease

Exchange Rate

According to Le Minh Truong (2021), the exchange rate is the price of onecountry's currency expressed in terms of another country's currency In other words, theexchange rate is the amount of another country's currency that one unit of one country'scurrency can buy at a given time

In Vietnam, according to research by Dinh and Nguyen (2008) or Bui Kim Yen andNguyen Thai Son (2014), there is a positive relationship between the stock price indexand the exchange rate When the exchange rate (VND/USD) increases, the VNDdepreciates, making the prices of Vietnamese domestic goods relatively cheaper whenexported abroad International trade activities are increasing and domestic enterprisesalso become more competitive in the international market As a result, the stock prices ofthese companies increased However, not all studies suggest that the exchange rate has a

positive effect on the stock price index Or Zhao H's (2010) study on the Chinese stockmarket according to VAR and conditional variance with multivariable generalizedgeneralized regression (GARCH) also shows that there is no effect between exchangerate and stock prices Similarly, Lou T, Luo W (2018) studied the markets of G7countries according to Granger causality test and also concluded that there is nosignificant relationship between stock price index and exchange rate in G7.

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

2.2 Literature review

2.2.1 International Studies

The relationship between monetary policies and stock market always occurs to beintriguing to scholars all over the world There are myriad research papers that havedelved into this particular topic and come to slightly different conclusions

Iddrisu Suhaibu, Simon K Harvey and Mohammed Amidu conducted research in

2017 based on the stock markets of the 12 African countries using the panel VAR modelwith five indicators: S&P global equity indices, inflation rate, money growth, realinterest rate and GDP growth The result shows that the stock market is positivelyinfluenced by their respective monetary policies via the interest rate but the reversereaction was not proven However, their results confirm the mutual relationship betweenmonetary policy and stock market performance

Yu Hsing’s research (2013) based on the Polish market using the GARCH modelrevealed that monetary policy affected the stock index but not fiscal policy in the Polishmarket In further detail, the author also concluded that imposing monetary policy strictlybased on a higher policy interest rate has a negative impact on the stock index, viceversa, loosening the policy based on the ratio of M3 to GDP could benefit or worsen thestock index

2.2.2 National Studies

Empirical Test on Impact of Monetary Policy and Fiscal Policy on Vietnam StockMarket Tu Tran Thi Thanh , Linh Pham Thuy , Tiep Nguyen Anh , Thuy Do Thi ThơThị Hoai Trương’s study using VECM (Utilizing Vector Error Correction Model)confirms that there is a relationship between monetary policy, fiscal policy and theVietnamese stock market In the short term, expansionary monetary policy helpsincrease money supply, which has a positive impact on the stock market, whiletightening monetary policy has the opposite effect But in the long run, the negativereaction of stock indices to monetary expansion due to increased money supply will lead

to higher inflation in the future and then negatively impact the economy and stockmarkets In addition, the Vietnamese stock market is also affected by exogenous factorssuch as world oil prices and the S&P 500 index, especially at a time when theVietnamese economy is opening up and integrating with the global economy Finally, thestudy highlights that not only monetary policy and fiscal policy affect the stock marketbut also their interaction

The research results of Trung Thanh Nguyen, Thi Linh Do and Van Duy Nguyenusing the GJR - GARCH model also showed similar results:

Monetary policy, including interest rates, exchange rates and required reserveratios, has a negative impact on stock prices in the long term In case of high inflation,state banks tighten monetary policy by increasing interest rates This will not affect thestock market in the short term but in the long run will have a negative impact onbusinesses Required reserve ratio policy also has the opposite effect on stock prices.Increasing the required reserve ratio at banks has limited the amount of exchangebetween banks and outside individuals and businesses In the short term, companies caninvest or create liquidity through external borrowing In addition, market shocks, whethergood or bad, cause inventories to fluctuate at a stable level

2.2.3 Discussion

In summary, studying the relationship between macroeconomic factors and stockmarket performance is a topic that has received great attention from researchers.However, in Vietnam there is only research on the impact of monetary policy, noresearch on fiscal policy Additionally, these authors focus only on assessing the impact

of responses and do not predict future changes that may be of interest to investors.Therefore, the author wants to test the impact of monetary and fiscal policies onVietnam's stock market operations as well as the interaction between these policies Wealso create market forecasts based on econometric analysis The relationship betweenmonetary policy and the stock market is increasingly attracting the attention of investors,researchers and policymakers Understanding how monetary policy affects the stockmarket is important for policymakers to make the right decisions and for investors todecide whether to invest

CHAPTER 3: ECONOMETRIC METHODOLOGY

3.1 Theoretical model specification

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

STO = f (lnM2, lnEXC, lnCPI, IR) orln(STO) =β0+β1×ln(EXC) +β2×ln(M2) +β3×ln(CPI) +β4×IR +𝑢𝑖

: the intercept

β0

, , , : slope coefficient

β1β2β3β4

ui: stochastic disturbance

STO: Vietnamese stock price (HNX - INDEX)

M2: Vietnamese money supply

EXC: Vietnamese exchange rate (VND/ USD)

CPI: Vietnamese inflation

IR: Vietnamese interest rate

Types of

Variables

correlationwithdependentvariableDependent

variable

lnSTO % Natural logarithm of stock

price indexIndependent

Consumer Price Index(representing Inflation)