Impact of macroeconomic factors on vietnam stock index empirical evidence from 2011 to 2019

However, because the Vietnamese stock market is still categorized to be weak form efficient, as such, the stock price and stock index of both stock exchanges, especially VN-Index of HOSE

Dissertation submitted in partial fulfilment of the requirement

for the MSc in Finance

FINANCE DISSERTATION ON

IMPACT OF MACROECONOMIC FACTORS

ON VIETNAM STOCK INDEX:

EMPIRICAL EVIDENCE FROM 2011 TO 2019

LA THI VAN ANH

ID No: 19046122 Intake 3

Supervisor:

ACKNOWLEDGEMENTS

Firstly, I would like to express my sincere thanks to the supervisor of my thesis, Prof Dr To Kim Ngoc, highly advanced If it were not for her support, guidance and orientation, I would not be able to complete this study

I would also like to thank all the teachers during the course at the Master of Finance program at the International School of Business, Banking Academy of Vietnam in association with University of the West of England The knowledge and insights I received from them greatly assisted me in the process of completing

my research

In addition, I would like to send my sincere thanks to the course-mates, who do not hesitate to share ideas, advice as well as encourage me during the time attending this master program

Lastly, I would like to thank my family and friends, whose encouragement gave

me the opportunity to study and get results today

TABLE OF CONTENTS

ACKNOWLEDGEMENTS 2

TABLE OF CONTENTS 3

LIST OF TABLES AND FIGURES Error! Bookmark not defined EXECUTIVE SUMMARY 6

CHAPTER 1 INTRODUCTION 7

1.1 Chapter Introduction 7

1.2 Contextual Background 7

1.3 Research Aim and Research Objectives 11

1.4 Brief of Method 12

1.5 Thesis Structure 13

1.6 Chapter Summary 14

CHAPTER 2 LITERATURE REVIEW 16

2.1 Chapter Introduction 16

2.2 Overview of Stock Market 16

2.3 Brief of Stock Index and VN-Index History 17

2.4 Past Research about Impact of Macroeconomics on Stock Index 21

2.5 Hypotheses Development: Impact of Macroeconomics on VN-Index 26

2.6 Conceptual Model 27

2.7 Chapter Summary 28

CHAPTER 3 RESEARCH METHODOLOGY 30

3.1 Chapter Introduction 30

3.2 Method and Reasoning Approach 30

3.3 Secondary Data Source 31

3.4 Definition of Variables & Ordinary Least Squares 33

3.5 Analytical Procedure 35

3.6 Chapter Summary 36

CHAPTER 4 DATA ANALYSIS 37

4.1 Chapter Introduction 37

4.2 Data Collection 37

4.3 Data Analysis 38

4.4 Discussion 45

4.5 Chapter Summary 45

CHAPTER 5 CONCLUSION 46

5.1 Chapter Introduction 46

5.2 Key Findings and Theoretical Contributions 47

5.3 Managerial Implications 49

REFERENCES 52

APPENDICES 58

Appendix A Example of Dataset 58

Appendix B SPSS Heteroscedasticity Outputs 59

LIST OF TABLES AND FIGURES

Table 1 Trading Volume in Vietnam Stock Markets from 2015 to 2017 21

Table 2 Descriptive Statistics of Data Error! Bookmark not defined Table 3 Pearson Correlation Matrix 40

Table 4 Skewness and Kurtosis Normality Test 41

Table 5 Durbin-Watson Test for Autocorrelation 42

Table 6 Multiple Regression Model Outputs 42

Table 7 Variance Explained 44

Figure 1 Stock Market Capitalization in Vietnam from 2008 to 2019 8

Figure 2 VN-Index Historical Data 20

Figure 3 Research Model 28

EXECUTIVE SUMMARY

In pace with rapid economic growth, the financial market in Vietnam has also been evolving In early 2000s, the Vietnamese government opened the first two stock exchanges, namely HOSE and HNX This marked a new era for the domestic financial market However, because the Vietnamese stock market is still categorized to be weak form efficient, as such, the stock price and stock index of both stock exchanges, especially VN-Index of HOSE, is heavily influenced by the changes in the macroeconomic conditions Therefore, understanding the impact of macroeconomic factors on stock market index is very relevant for local investors and policy makers in the context of Vietnam The main purpose of this study is to investigate the relationships between a variety of different macroeconomic factors and VN-Index that represents the stock index of HOSE as the largest stock exchange in Vietnam in terms of market capitalization The second data are collected within the 9-year period from 2011 to 2019 on the basis of quarter interval, leading to the final dataset consisting of 36 observations The results of multiple regression model, which is an extension of the ordinary least squares (OLS), show that GDP growth rate and foreign direct investment (FDI) have a significant and positive impact on increasing VN-Index while interest rate shapes

a negative impact on VN-Index Interestingly, it is also founded in this paper that consumer price index (CPI) and inflation rate are non-significant factors that are actually unrelated to VN-Index These empirical findings might provide insightful and relevant implications to both local investors and policy makers in Vietnam, especially during this pandemic time which has been witnessing many changes in the Vietnamese stock market

CHAPTER 1 INTRODUCTION

1.1 Chapter Introduction

This introductory chapter aims to set a sense for this empirical thesis paper It focuses on describing the financial context in Vietnam and the establishment and development of the main stock exchange market, namely Ho Chi Minh Stock Exchange (HOSE), to highlight the strong impact of macroeconomic factors on stock index, namely VN-Index that represents the stock index of HOSE This description pinpoints the major research problem that this study wants to focus on

as well as the rationale for conducting this study in order to provide relevant implications to both local investors and policy makers Based on this rationale, the subsequent part of this chapter formulates the primary research aim and more specific research objectives that this study wishes to accomplish in the end

“Doi Moi” or reform policy in the 1986 has opened the new door to foster the

market-oriented economic model, has become the primary driver of the economy

of Vietnam over the past decades In pace with the rapid economic development

and openness policy, the Vietnamese government launched the Ho Chi Minh

Securities Trading Center (renamed as Ho Chi Minh Stock Exchange – HOSE)

and the Hanoi Securities Trading Center (renamed as Hanoi Stock Exchange –

HNX) in early 2000s This opened a new era that has witnessed many changes in

the financial trading and equity market in Vietnam In fact, as can be seen in

Figure 1, the stock market capitalization in Vietnam has kept increasing quickly

since 2008 Thereby, in 2008, it was only valued at $12.37 billion but in 2019, it

increased to $149.82 billion, which made Vietnam become the 26th largest stock

marketing in the world in terms of market capitalization, according to the The

Global Economy As a consequence of this impressive performance, VN-Index,

which is the stock index of HOSE, has also remarkably grown in such an

adolescent market

Figure 1 Stock Market Capitalization in Vietnam between 2008 and 2019

(in billion dollars)

Source: The Global Economy

Since two stock exchanges in Vietnam, namely HOSE and HNX, went into operation, it has given new investment channels for many investors and financial experts in Vietnam In fact, the rapid expansion of stock market as mentioned above in the wave of the economic booming in Vietnam has opened huge opportunities for local investors and financial experts to seize such opportunities during this golden time (Vo, 2017) Nonetheless, on the flipped side of the coin,

as Vietnam is still a developing market, meaning that the domestic stock market in Vietnam is subject to high degree of volatility and not efficient (i.e weak form of market efficiency) because the stock prices are not directly and immediately influenced by the market information, any changes in macro-conditions have tremendous effects on the stock prices in Vietnam Indeed, in a highly efficient market, stock prices are mainly driven by public information (Mobarek and Fiorante, 2014) but since Vietnam is categorized to be weak form efficient, VN-Index is still heavily affected by both historical transaction information (past prices, historic volumes) and only slightly affected by public information As such, the stock market in Vietnam is of high risk and fluctuations, this then pressures local investors a lot given the great deal of uncertainty in the stock prices Therefore, local investors demand for more useful information about the stock markets, especially historical information that is related to stock prices, to make accurate investment decisions and to reduce the risk of failure

In high market efficiency, macroeconomic policies can be comfortably implemented because such policies do not create significant impact on the stock market (i.e as stock prices are only the full reflection on all relevant market

changes can generate enormous effect in the stock price (Mobarek and Fiorante, 2014) In particular, in emerging and developing markets, previous research has supported the idea that the performance of stock price is more vulnerable to the macro fluctuations than developed markets (e.g Victor and Kuwornu, 2011; Zakaria and Shamsuddin, 2012) During 2000s when the economy of Vietnam suffered from abnormally high volatility with high interest rate and high inflation rate, macro fluctuations dramatically influenced the stock prices and VN-Index For example, in February 2009, VN-Index reached its ever lowest bottom of only 235.5 points, which was mainly due to the transmission of 2008 financial crisis consequences on Vietnam economy (Vo and Ellis, 2018)

Overall, given the fact that Vietnam stock market suffers from weak form efficiency, the local stock market has high degree of volatility and the stock prices are largely determined by historical data As such, it is technically very tough for investors to effectively make prediction for future prices for trading decisions This means that it is very important and relevant for both investors and policy makers in Vietnam to have a thorough and clear understanding of the impact of past macroeconomic forces, such as interest rate and inflation rate, on the stock prices and stock index in Vietnam in the past because these sorts of “historical” macroeconomic information can be the best predictor of the future stock prices as well as fluctuations in the market, as compared to other technical analytical tools that are often seen in developed markets whose high market efficiency This then necessitates more urgent empirical research to acquire such knowledge

Although previous research in the area of finance has quite extensively examined the relationships between macroeconomic factors and stock index, such studies have mostly been conducted in developed markets (Al-Tamimi, Alwan, and Abdel Rahman, 2011), while little is known about this linkage in the context of developing and emerging markets like Vietnam Also, due to the institutional differences such as regulations, locations, or investment types, it is very hard to replicate the findings from past research being conducted in developed markets to developing markets (Al-Tamimi, Alwan, and Abdel Rahman, 2011) Each market has several own unique features that affect the stock prices and subsequent stock index, which might not be founded in other international marketplaces In fact, the knowledge of the influences of macroeconomic forces on stock index, namely VN-Index, remains largely scant and unaddressed in the context of the stock market in Vietnam This requires urgent empirical research to fill this paucity in order to provide empirically sound knowledge that might be very useful and relevant to local investors as mentioned earlier Especially, given the outbreak of the COVID-19 and its impact on the Vietnam’s economy (World Bank, 2020), having an up-to-date understanding how macroeconomic factors really influence stock prices and VN-Index in the past is very relevant and timely for local investors in Vietnam during this hard time Such understanding is really necessary

to help mitigate the possibilities of making wrong trade and investment decisions for local investors when the domestic stock markets in Vietnam are now highly fluctuated and full of chaos as a result of the unpredictable changes in the global financial markets caused by the COVID-18 crisis

In accordance with the research problem as pinpointed earlier, the major aim of this empirical research is to understand the linkage between macroeconomic conditions and the Vietnam stock index (i.e VN-Index), which represents capitalization-weighted index of all companies being listed on the Ho Chi Minh City Stick Exchange as the largest stock exchange market in Vietnam In particular, consistent with this major aim, there are the following particular objectives that are set for this study:

To review a number of macroeconomic factors that could determine stock market index

To identify significant macroeconomic factors that have affected the Vietnam stock index (i.e VN-Index) during the period from 2011 to 2019

To provide implications to both investors for their future investments in the local financial market and policy makers in order to create a more sustainable and stable domestic stock market, especially during this COVID pandemic

1.4 Brief of Method

Regarding the method for addressing the aim and objectives above, multiple regression is adopted in order to examine the correlational relationships between a number of potential macroeconomic factors (i.e gross domestic product-GDP growth rate, consumer price index-CPI, inflation rate, interest rate, and foreign direct investment-FDI) and VN-Index Multiple regression model is regarded as the extension of the ordinary least-squares (OLS) regression that involves more than one explanatory variable, which is the most commonly used tool in

econometrics to examine and estimate the linear relationships between a set of explanatory (independent) variables and one dependent variable (Berenson, Levine, and Krehbiel, 2012) As such, the choice of multiple regression is perfectly suitable for the overall above-stated aim that wishes to quantify the correlational relationships between macroeconomic factors and VN-Index in the milieu of Vietnam Consistent with this, in this regression model, VN-Index, which represents the stock index of the Ho Chi Minh Stock Exchange (HOSE) as the largest stock market in Vietnam, is input as the dependent variable while five other macroeconomic factors above are specified as five dependent variables (predictors) in the model Meanwhile, the secondary data to measure these variables are retrieved from different Internet-based sources which are publicly available and accessible such as FX Empire dataset, Investing.com webpage, and the General Statistics Office of Vietnam The secondary dataset eventually contains a total of 36 observations, which are equivalent to 36 quarters from 2011

to 2019 as the main period for the longitudinal data in this empirical study

1.5 Thesis Structure

After having formulated the research background and research goal, the rest of this thesis report is organized into the four consecutive chapter units Chapter 2 will cover the theoretical background of this research topic, thereby an overview

of the VN-Index history will be provided and a critical review of stock related macroeconomic factors will also be conducted to shape a strong theoretical grounding for the variables used It is followed by the development of hypotheses that link the main macroeconomic factors in this study to VN-Index

index-Subsequently, Chapter 3 will explain the methodology being adopted for undertaking this research, describing the secondary data sources being collected and variables being used in the multiple model as well as the analytical approach for analysing the collected data The rationale for choosing ordinary least squares modelling shall also be justified carefully in this third chapter Next, Chapter 4 shall present the results of the secondary data analysis, regression outcomes will

be presented and interpreted to provide statistical evidence for identifying the correlational relationships between predicted macroeconomic factors in the model and VN-Index New results will then be discussed relative to the extant literature Finally, Chapter 5 shall wrap this thesis report up, thereby the key findings will first be summarized to give the implications for both theory (e.g scholars) and practice (e.g investors, policy makers) The end of this report will address several key limitations that can be improved in future research

ensuing chapter is going to cover the theoretical background and develop the hypotheses

CHAPTER 2 LITERATURE REVIEW

2.1 Chapter Introduction

This second chapter is focused on covering the body of related theories for this empirical research topic It first defines the concept of stock market from the extant literature in finance domain, which helps to build the basic theoretical underpinning to help the general readers understand the nature of the stock market Subsequently, it introduces the concept of stock index and its calculation

as well as reviews the development of HOSE and its main index, VN-Index The following part conducts a systematic review on past research about the impact of different macroeconomic factors on stock price in various contexts, which helps to lay down the theoretical foundations for developing a series of hypotheses that link five different macro factors (GDP growth rate, consumer price index-CPI, inflation rate, interest rate, and foreign direct investment-FDI) to VN-Index The final part presents the research model being built for this empirical paper

2.2 Overview of Stock Market

The stock market represents a typical financial market In the contemporary financial marketplace, stock market is the place whether the activities of trading the medium and long-run securities are taken place In other words, the stock market is also the place for gathering financial information to make the buying or selling decisions on the trade securities to exchange the ownership of the securities such as stocks or bonds (Cecchetti, Schoenholtz, and Fackler, 2015) From a behavioural perspective, when people have the idle money, they are often prone to make investments in order to gain more earnings As such, the stock

market provides the opportunities for investors to earn money through making transactions for securities Also, the stock exchange is the venue where the government can mobilize the capital by issuing the bonds, which help to get the money from the public so as to invest in different projects (Fontana and Scheicher, 2016)

On the other side, a stock which is listed on the stock exchange must meet several different requirements according to the law of the home market Stock price is an important financial indicator to predict the profitability and overall performance

of the company in the marketplace (Fontana and Scheicher, 2016) As such, the fluctuation in the stock price is the strong forecast of the future business cycle of the company

2.3 Brief of Stock Index and VN-Index History

First of all, it should be recalled that the stock (market) index is a useful indicator

to measure the performance of the stock market that helps the investors to make comparison between past price level and present price level This index is often calculated from the prices of some selected stocks through weighted average market capitalization method, which is determined by multiplying the current market price with a number of selected outstanding stock to take the averaged weight (Boudt, Raza, and Wauters, 2019) Market capitalization is the sum of stock price multiplied by the number of shares while the weight of each single stock is the ratio of its corresponding market capitalization to total market capitalization

Because this paper is particularly focused on the stock index in the Vietnamese setting, it is of importance to have an overview of the stock market in Vietnam to understand the formulation of VN-Index In pace with openness policy and market-led economic model, in July 1998, the Vietnamese government decided to open the first two securities trading centers based in Ho Chi Minh city and Hanoi capital In Ho Chi Minh, it was Ho Chi Minh Securities Trading Center, which was latter renamed as Ho Chi Minh Stock Exchange – HOSE, designed as a centralized securities market In Hanoi, it was Hanoi Securities Trading Center, which was then renamed as Hanoi Stock Exchange –HNX At first, the number of listed firms on these stock exchanges was very limited but expanded over the time Today, HOSE has more large-scale companies while HNX is the trading exchange for mainly local small and medium-sized firms Enterprises have to meet some requirements in order to be eligible to be listed on HOSE and HNX At HOSE, listed companies must have the registered capital amount higher than 120 billion VND (nearly $6 million) and satisfy some other legal regulations in order

to be listed (Hieu, 2019), which is referred to as Initial Public Offering-IPO As of end of 2017, totally 366 stocks were available on HOSE, there were additionally 3 fund certificates and 45 bonds (HOSE annual report, 2017) The stock index for HOSE is VN-Index, which is the main index that will be analyzed in this paper For HNX, listed enterprises must have the registered capital total of higher than

30 billion VND and also need to meet some legislative rules to be listed on this stock exchange, such having over 1-year operation in the form of a shareholding enterprise at the time of registering or Return on Equity (ROE) of the preceding year of above 5% (Hanoi Stock Exchange website, n.d) As compared with

HOSE, as of 2017, HNX had totally 384 stocks (HOSE annual report, 2017) However, as this current paper is concentrated on VN-Index, HOSE will be the main focus in this study

The stock and security market in Vietnam is characterized by a number of unique features First, two main exchange markets have become an essential investment channel for mobilizing capital and funding, establishing the favourable environments to help local firms to mobilize their capital and improve investment activities Two security exchanges have also been regarded as the places where the central government can issue bonds as mentioned earlier As such, the stock exchange market in Vietnam has significantly contributed to the overall economic growth as well as the restructuring of the banking and financial sector The improved fairness and transparency in two stock markets have also reflected on the transparent investment environment in Vietnam to attract more foreign investments (Malesky, McCulloch, and Nhat, 2015) Moreover, some commercial banks which are listed on two stock exchanges have mobilized a large amount of capital through equity offerings The presence of these listed commercial banks has also contributed to the transparency of the structure of shareholding structure Plus, two major stock markets in Vietnam have assisted the equitization of state-owned enterprises (SOEs) as well, this contributed to the restructuring of many SOEs, especially during the period from 2001 to 2015 This is aligned with the macro policy of the Vietnamese government that attempts to reduce the number of SOEs to promote the growth of private firms and private sectors (Malesky, McCulloch, and Nhat, 2015)

Figure 2 VN-Index Historical Data

Source: TRADING ECONOMICS

Figure 2 depicts the changes in the stock index (VN-Index) from HOSE during 2000-2020 period The index was significantly declined in 2009 as a result of the global financial crisis in 2008 but started to recover since 2011 onward Meanwhile, Table 1 shows the increase in the trading volume associated with market capitalization of securities and stocks in Vietnam from 2015 to 2017 It is clearly shown that during this period, there has been a stable increase in the number of trading shares (both sell and buy) In 2017, the market capitalization of Vietnam’s stock market, combing Ho Chi Minh Stock Exchange and Hanoi Stock Exchange, was valued at VND 3,515 trillion, which accounted for 74.6% of the country’s GDP (HOSE annual report, 2017) This makes the Vietnamese stock market become one of the world fast-growing financial markets

Table 1 Trading Volume in Vietnam Stock Markets from 2015 to 2017

Source: HOSE Annual Report (2017)

However, on the flipped side of the coin, the Vietnam stock markets are also subject to high degree of volatility in the beginning, which are caused by the fluctuations of the macroeconomic factors and global recession, mainly due to the

2008 financial crisis The listed items on two exchanges are also quite limited, as only stocks and governmental bonds plus several investment funds are available, the investment portfolio is thus not diversified There is also a shortage of professional credit rating agencies, such as professional long-term investors (investment funds, retirement funds, insurance services) (Vo, 2016) In addition, the market discipline is weak, especially in terms of executing the information disclosure obligation of market’s participants, which is attributed to the weak form efficiency of Vietnamese stock market (Vo, 2016)

2.4 Past Research about Impact of Macroeconomics on Stock Index

Stock prices have traditionally been a key focus in the financial market, thus numerous past empirical papers have discussed a variety of antecedents of stock prices Al-Tamimi, Alwan and Abdel Rahman (2011) emphasize that determinants of stock prices can be viewed from both internal and external

earnings to consider the stock price change, others have shifted the focus toward external forces such as inflation rate to understand the stock market (Al-Tamimi, Alwan, and Abdel Rahman, 2011)

Prior scholars have stated that macroeconomic variables shape a strong impact on the stock prices, in turn determining the stock market index In particular, the impact of monetary and fiscal policies on the stock market should not be disregarded, whereby the governmental financial policies to influence macroeconomic factors would create huge impact on the economic activities, including stock market exchange (Atiq, Rafiq, and Roohullah, 2010) This then motivates many scholars to examine the linkage between these macroeconomic determinant factors and stock price associated with stock index Literature documents a number of macroeconomic factors that are theorized to affect the stock prices, including foreign direct investment (FDI), gross domestic product (GDP), M2, inflation rate, interest rate, and consumer price index (CPI)

Several former studies have examined the existence of the link between money supply (M2) and stock price in the light that a shift in money supply will lead to a fluctuation in the stock price, which means that the change in money supply growth rate would act as a preceding determinant of stock price variability (Reilly and Brown, 2003) Although deflated price of stock may be influenced by increased quantity of M2, it may take few months to see this effect (Reilly and Brown, 2003) Overall, when the government increases the expenditure (spending), this would create a stimulating effect to boost the economy and foster share prices (Cleary, 2001) In a broader picture, Ibrahim and Yusoff (2001) find

that, in the context of Malaysian stock market, M2 positively affects stock price in the short-term but negatively affects stock prices in the long-term Overall, because the changes in the stock prices have an impact on the economy, government can affect the stock price and subsequently stock index through different monetary and fiscal policies

Literature indicates that stock prices are supposed to raise in line with the decline

in interest rate because it will become cheaper for firms to conduct their projects and operate their business which are financed by funds and loans being borrowed from the banks and other financial institutions (Ferrer, Bolós, and Benítez, 2016)

At the same time, lower cost for borrowing enables gaining higher earnings due to the rise of perceived stock value Therefore, the association between interest rate and stock price is inverse, thereby increased interest rate would result in a decreased stock price and vice versa (Andrews, 2004) Many researchers have also been interested in the relationship between inflation and stock prices In other words, the adverse influence of inflation rate on stock prices would be concerned because inflationary price generates the feeling of uncertainty and the lack of confidence toward the future As a result, this makes common shares less appealing to investors who hesitate to purchase stocks during highly inflated period (Cleary, 2001) In fact, higher inflation makes interest rate inflated and this growth of interest rate will drop the stock prices, making stocks perform poorly in the market Therefore, stock prices decline in an inflationary environment due to raised rate of interest (Andrews, 2004), which is also empirically supported by Zhu (1999) in the context of Chinese stock exchange market Atiq, Rafiq and

living increased and the propensity for saving increased as well, this leads to the reduction in investments in the stocks trading

However, the interrelationship between stock prices, inflation and interest rates is not always straightforward and consistent (i.e it is not always negative) That is, change in inflation would lead to the change in cash flow for stocks but whether this cash flow change can pressure the interest rate or not is unsure (Reilly and Brown, 2003) Also, depending on the source of inflation, inflation could potentially spur positive impact on stock return (Ewing, Forbes, and Payne, 2003)

In this regard, Reilly and Brown (2003) emphasize that in certain markets, dividend and earning per share might react positively to the increase in inflation and interest rates, implying that stock prices have then positive correlation within interest and inflation rates This point is reinforced by Mukherjee and Naka (1995) who confirmed the mixed effects of interest and inflation rates on stock prices in Japan

On the other side, Adam and Tweneboah (2008) collect the data from the Ghanaian stock market between 1991 and 2006 and conclude that foreign direct investment (FDI) has a positive impact on the stock price level in this particular market because an increased FDI inflow provides the capital to boost the local economy, in turn making the properties such as stocks more valuable In New Zealand stock market, Gan et al (2006) investigate the impact on gross domestic product (GDP) on the domestic share price index (NZSE 40 as the main stock market index in this country) and reveal that a long-run positive association between GDP and this NZSE 40 is established Meanwhile, Al-Tamimi, Alwan

and Abdel Rahman (2011) explore major external macroeconomic drivers that determine the stock price in UAE by sampling 17 firms between 1990 and 2005 and unveil that consumer price index (CPI) would account for a major portion of the variance in stock price and this macroeconomic factor has a negative effect on stock price, this makes sense because CPI is often associated with inflation rate (i.e higher CPI also means higher inflation rate, Huang and Liu, 2005) Against this point, Ibrahim (2003) uncover that in the Malaysian stock market, the stock index is positively driven by CPI, which is explained by the authors that since higher CPI reflects the more dynamic consumption of the local economy, people spend and purchase more to stimulate the economy, thus subsequently nourishing the stock market

In light of the preceding literature review above, it suggests that although stock prices are influenced by macroeconomic and financial fundamental variables across different markets, the effects are mixed For instance, while short-run interest rate might positively affect stock prices, long-run interest rate could positively affect stock prices This implies that the literature provides mixed, contradictory and inconsistent results regarding the impact of various macroeconomic factors on stock prices and resulting stock index, highlight the idea that the macroeconomic effects on stock index would be contextual, depending on the specific market to be investigated Thus, prior results from past research would not be true for the case of Vietnam stock market This encourages more empirical and timely research to be conducted in order to understand this relationship between macroeconomic environment and stock index in the

Essentially, although past research within the stream of the impact of macroeconomic factors on stock market index has adopted different models to examine this relationship, the majority of previous papers have used ordinary least squares (OLS) method that is reliant on regression-based modelling for understanding this linkage (e.g Al-Tamimi, Alwan, and Abdel Rahman, 2011; Hussainey and Khanh Ngoc, 2009) This lays down the theoretical foundation for adopting OLS method in investigating the relationship between macroeconomic factors and VN-Index in the milieu of stock market in Vietnam

2.5 Hypotheses Development: Impact of Macroeconomics on VN-Index

The review of literature above has basically theorized the five key macroeconomic factors that might potentially predict the stock prices and subsequent stock market index (i.e because the stock index is computed from the stock prices), namely GDP growth rate, consumer price index (CPI), inflation rate, interest rate, and foreign direct investment (FDI) Because those papers being reviewed in the prior section have mainly been conducted in emerging contexts, such as UAE (Al-Tamimi, Alwan, and Abdel Rahman, 2011), Malaysia (Ibrahim, 2003), or Ghana (Adam and Tweneboah, 2008), these papers would provide strong theoretical grounding for this current study that is also being carried out in an Asian developing context, namely Vietnamese stock market The systematic review above then shapes the basic theoretical underpinnings for the existence of similar relationships in the context of Vietnam As such, to address the influences of those five major macroeconomic variables on VN-Index that represents the stock index of HOSE as the largest stock exchange market in Vietnam, the five

following hypotheses are then postulated in order to propose the relationships between these macro factors and VN-Index in the particular milieu of stock market in Vietnam:

Hypothesis 1: There is a relationship between gross domestic product growth rate and stock index

Hypothesis 2: There is a relationship between consumer price index and stock index

Hypothesis 3: There is a relationship between inflation rate and stock index

Hypothesis 4: There is a relationship between interest rate and stock index

Hypothesis 5: There is a relationship between foreign direct investment and stock index

2.6 Conceptual Model

The following framework, which is based on the original model coined by

Tvaronavičiene and Michailova (2006), represents the conceptual model of this

research study Accordingly, five macroeconomic factors, namely foreign direct investment (FDI), gross domestic product (GDP), M2, inflation rate, interest rate, and consumer price index (CPI) are defined as five independent variables while stock index, namely VN-Index, is defined as the dependent variable This conceptual framework acts as the baseline model for collecting secondary data and running the multiple regression analysis

Figure 3 Research Model

Source: Tvaronavičiene and Michailova (2006)

2.7 Chapter Summary

This second chapter has primarily concentrated on shaping the theoretical grounding for this empirical research paper Consistent with this, the beginning of this chapter has defined what is the stock market and what is the stock index to help the general readers have a basic understanding of these financial concepts as well as the nature of the stock market Importantly, the ensuing part in this chapter has conducted a comprehensive review regarding the relationships between macroeconomic forces and stock price and stock index by a sizable body of previous research in different contexts This systematic review is indeed needed in order to lay down the fundamental theoretical foundations for proposing the five main hypotheses in this which, which connect five key macroeconomic factors

(GDP growth rate, consumer price index-CPI, inflation rate, interest rate, and foreign direct investment-FDI) with VN-Index The final part has then presented the results of this literature review by demonstrating a conceptual model that represents all main factors and hypotheses in an integrated model The following chapter is going to address the method being adopted to carry out this study

CHAPTER 3 RESEARCH METHODOLOGY

3.1 Chapter Introduction

This chapter addresses the method for undertaking this research It first explains the choice of quantitative method and rationalizes the deductive reasoning approach for this empirical study Subsequently, this chapter explains the use and collection of secondary data sources that are related to this research topic Next, this chapter describes and defines the key variables being used in this study, including five independent variables (GDP growth rate, consumer price index-CPI, inflation rate, interest rate, and foreign direct investment-FDI) and the main dependent variable (VN-Index) that are consistent with Figure 3 above The choice of multiple regression model as an extension of the ordinary least squares (OLS) is also justified in this chapter Finally, the analytical approach is carefully explained

3.2 Method and Reasoning Approach

In the field of social sciences, there are the two different methods that should be considered: qualitative method and quantitative method Qualitative method is exploratory by nature to only gain unstructured and basic information about the research problem, hence qualitative method only deals with non-numerical data (Babbie, 2012) In contrast, quantitative method is descriptive by nature in order

to describe the key characteristics of the research problem and thus quantitative method deals with numerical data (Babbie, 2012) Recalling that the main goal of