Khóa luận tốt nghiệp Tài chính ngân hàng: The Impacts of Interest Rate on Stock Market: Empirical Evidence from Ho Chi Minh Stock Exchange

Factors that affect the stock market The factors affecting the stock market include economic factors such as GDP growth,inflation, interest rates, consumer price index, oil prices, Polit

VIETNAM NATIONAL UNIVERSITY

UNIVERSITY OF ECONOMICS & BUSINESS

FACULTY OF FINANCE AND BANKING

GRADUATION THESIS

The Impacts of Interest Rate on Stock Market:

Lecturer : Le Thi Phuong Thao Name : Hoang Long

Student Code : 19050687 Class : QH2019E TCNH CLC 2

Ha Noi, 11/05/202

I hereby declare that the research topic: "The Impacts of Interest Rate on Stock Market:Empirical Evidence from Ho Chi Minh Stock Exchange" is my own work All results of theresearch are the outcome of my own efforts in finding data, reading, translating documents,running software, synthesizing, and conducting the research The theoretical content of theresearch utilized some reference materials, and I have fully cited the sources in thereference section

I assure that the data and results in my research are truthful, objective, and have not beenpublished in any other work

If there is any fraudulence, I take full responsibility

Thesis author

Hoang Long

To complete this scientific research project, I would like to express my sincere gratitude to:The University of Economics & Business - Vietnam National University, Hanoi for providingfacilities and modern library system with a variety of research materials, high-qualityscientific articles, and especially the electronic library system which facilitated our researchwork in the context of the pandemic

I would also like to extend my heartfelt thanks to the professors and lecturers of UEB ingeneral and the Department of Finance and Banking in particular for their dedicatedteaching and equipping us with precious and useful knowledge throughout our studyperiod at the university It is thanks to that valuable knowledge that we have a good

foundation to complete this research project

Especially, I am extremely grateful to Mrs Le Thi Phuong Thao, who directly guided me incarrying out my thesis topic during this time Thanks to her enthusiastic help and guidance,

I have gained more knowledge and valuable experience to be able to complete my research

project.

Due to the limited experience in analysis and knowledge, this research project may havesome shortcomings I sincerely hope to receive valuable comments from the professors andlecturers to improve my research work

Finally, I would like to wish the professors and lecturers good health, success, and

happiness

Ha Noi, May 11, 2023

Thesis author

Hoang Long

LIST OF CONTENTSDECLARATION 1

ACKNOWLEDGMENTS 2

CHAPTER 1: INTRODUCTION 5

CHAPTER 2: LITERATURE REVIEW AND THEORETICAL FRAMEWORK ABOUT INTEREST

RATES AND IMPACT OF INTEREST RATES ON STOCK MARKET 8

2.1 Theoretical Dasis s te HH nhà gàng pH tre 8

2.1.2 Overview Of interest FAÉ€ <1 1 1.11 8

2.1.2 Overview Of StOCK Market ceseessssssessescssesseesstesstesseesseeseeeseesseessessseesseesntesstesseeesteeseesseenee 112.2 Literature FEVICW HH HH Hàn HH HH HH HH HH Hà Hà gệt 152.2.1 Overview Of fOreign SEUÏ@S «ch nàn nành hiện 152.2.2 Overview Of domestiC SEUÌÏ@S c-ccc<crsrrrrrirtrirtrirtrirriiriiiiiiiririrrree 182.2.3 ResearCh Gap eecsecsecsssssecsessecssecsecsssssecseesecsessecseessecsecsessseeseesuecaseseeseeseesseeseeseeseeateeneeaseeseeneessees 19

CHAPTER 3: RESEARCH METHODOLOGY 20

3.1 Overview of VECM MOCdel e cs++xxsererrttrrtrrtkiitrirtrirrriirrriiriirrirrriirrrrrrkerrkee 203.2 Model speCifiCatÏOI - «ch 11.11 0111111 25

3.3 Description Of Variables -« -s« rét HH HH HH nàn HH nhưệt 26

3.4 Research Dafa -. - set HH HH HH HH HH HH HH HH HH gà niên 26

CHAP 4: RESEARCH RESULTS 27

canh ro 0 j0 27

4.2 THE IMPACT OF REFINANCE INTEREST RATE ON VN30 INDEX 28

4.3 THE IMPACT OF INTERBANK RATE ON VN30 INDEX e, 34

LIST OF TABLES

Table 3.1: Variables DesCrÏDtÏOI « «5+ TH HH HH H111 1kg 31Table r0 ir)v20-8( 0 11 .ố 32Table 4.2: Lag Order Selection CTÏt€TÌ4 «-cssxsre htrHHH H111 ktrkrrrrii 34Table 4.3: Cointegration Test ReSuÏ( - sec 111111

Table 4.4: VECM model estimation results

Table 4.5: Granger causality test F@SUÌfS «ccxccrkrkrrtErttittiiiiiiiiiiirrerie 37Table 4.6: Residual Test (217 38Table 4.7: Variance DeCOMPOSItiON uu ssseessessecteesteseeseestecseesecseesteeseestesseeseesteeseesteeseestesseeatesneeaeensees 39Table 4.8: Lag Order Selection Criteria 2 -cs-creerrrrrrrrrrrirtrrirrrrirrrrirrrrrirrrrrrrrirrrrierrrke 40Table 4.9: Cointegration Test 2 w.cecsssesssssecssessessesssesecssessessseseesssssssneeasesnsesseseesseseensesseeseesseseeneensees 41Table 4.10: VECM model estimation results 2 essesessesseessesssessssesssesssessseesseeseeesessersessseeneeeseeesy 42Table: 4.11: Granger causality test reSUlts 2 eeesessesssecssesecseestscneestesseeseeseeseesecneeateeseesteseentensees 43

Table 4.12: Residual Test ReSult 2 oc eeesssssssssssesssstecsessseenssssesssasssnseateensensesteeseeateeseeasesseeateseeasensees 44

Table 4.13: Variance DeCOMPOSitiOn 2 eeeseessstesseesseesstesssesseessessseesseesseessteeneeesteesteenteeateesteesaeenseesaeesy 46Table 5.1: Granger causality test SUMIMATY secsssecssesecsseseecssessesseessesseeseeseeseeseeaseateeseeseesseestessees 48

CHAPTER 1: INTRODUCTION

1 The Rationale Of The Research

Vietnam's stock market has been established and developed for 21 years, though its age

is still young compared to other international stock markets, Vietnam's stock market hasattracted many domestic and foreign investors and has set many records in 2021 Vn-Indexreached a record high when reaching 1,500.81 point on November 25 (an increase of nearly36% compared to the end of the year 2020) Over the past 11 years, this is the second-bestincrease after 2017 (up almost 48%) Notably, HNX-Index increased by 133.35% - the bestincrease in Asia These results have put Vietnam's stock market in the group of 7 marketswith the highest growth in 2021 with 35.73% (behind Abu Dhabi, Argentina, the UnitedStates, Iceland, Austria, and the Czech Republic) According to the State SecuritiesCommission, by the end of November 2021, the market capitalization of Vietnam's stockmarket has reached VND 9.19 million billion, equaling 147.97% of GDP, up 37.6%compared to 2020 Besides, according to data from the Vietnam Securities Depository

(VSD), since the beginning of 2022, the market has added nearly 2.4 million new securities

trading accounts These are all very encouraging numbers (mof.gov.vn statistics)

Up to now, about 7% of Vietnam's population invest on securities However, the stockmarket is always full of risks and can cause great reduction on assets’ value without areasonable investment strategy Typically, at the end of 2022, from the historical peak ofVNIndex, the index fell to the area of 873 points and ended 2022 at 1,007 points -

equivalent to a loss of 32.78% - the second largest decrease in the history of the market, cut

off 3 years of consecutive growth of the index.

There is a need to find the influencing factors to explain the fluctuations of the stockmarket Because through that, investors have more bases to make more accurateinvestment decisions and reduce risks Among the influencing factors, macro factorsincluding interest rates set by the central bank to stabilize or adjust the inflation level,control the economic growth rate etc., are important causes of fluctuations occurring in thestock prices The research: “The Impacts of Interest Rate on Stock Market: EmpiricalEvidence from Ho Chi Minh Stock Exchange” will study the relationship between interestrates and the stock market in order to achieve that objective

2 Research Objectives

2.1 Overall Objective

Find out the relationship and interaction between interest rates and the VN30, from which

to draw relevant conclusions and some recommendations for investors

2.2 Detailed Objectives

- Present relevant theories models

- Review the literature

- Study the interaction between interest rate and VN30

- Draw conclusions based on the results obtained, propose some recommendations for

- What is the correlation between interest rates and the VN30?

- Some recommendations for the state and investors?

5 Research Methodologys

The research was carried out through two main methods: qualitative research andquantitative research

5.1 Qualitative Research

Based on previous studies and related theories, the author uses qualitative researchmethods to refer to documents to have a more multi-dimensional perspective.

5.2 Quantitative Research

Throuph the collected past data, process and apply the data to the VECM model to find outthe correlation between the two variables mentioned above

6 Contributions Of The Study

The research contributes to the literature by providing understanding on the impact ofinterest rates on VN30 using VECM model

8 Structure Of The Research

In addition to the "Introduction" and "Conclusion", the thesis consists of 3 chaptersincluding the following contents Chapter 2 provides an overview of research on the impact

of interest rates on the VN30 stock index Chapter 3 describes the characteristics of thevariables as well as the models and data that will be used for the topic Chapter 4summarizes the results obtained after running the data and testing the quality of the model.Conclusions and recommendations will be presented on Chapter 5

CHAPTER 2: LITERATURE REVIEW AND THEORETICAL FRAMEWORK ABOUT

INTEREST RATES AND IMPACT OF INTEREST RATES ON STOCK MARKET

2.1 Theoretical basis

2.1.1 Factors that affect the stock market

The factors affecting the stock market include economic factors such as GDP growth,inflation, interest rates, consumer price index, oil prices, Political events such as elections,policy changes, and geopolitical tensions etc can also impact the stock market So, if thereare many people who want to buy a commodity and demand becomes greater than supply,the price tends to increase and vice versa The same goes for stocks, if a stock is sought after

by many investors, its price tends to increase The factors mentioned above affectinginvestor sentiment, thereby affecting the decision to buy and sell securities or in otherwords make the supply and demand for stocks change, leading to an increase/decrease inthe index In this study, author will delve deeper into the impact of interest rate on stock

market index

2.1.2 Overview of interest rate

2.1.1.1 Definition

Interest rate in general is the amount of money that an individual or organization must pay

to the lender, or receive from a bank or financial institution when borrowing money Theinterest rate is calculated based on the percentage of the amount borrowed or lent and theprincipal

For example, if you borrow 100 million VND and have to repay an interest of 15 millionVND after one year, interest rate will be 15% per year Interest rates can also be calculatedfor short-term loans, such as credit cards or other short-term loans

2.1.1.2 Classification And Functions Of Interest Rate

Interest rates are a fundamental aspect of the financial system and play a vital role in theeconomy They are the cost of borrowing money and the compensation for lending money.Interest rates affect every aspect of the economy, including consumption, investment, andinflation Understanding the different types of interest rates and their functions is crucialfor making informed financial decisions Based on different criteria, interest rates can beclassified as follows:

Based on the nature of the loan:

Basic interest rate: used as a basis for determining interest rates for credit services

Bank deposit interest rate: the interest rate that banks pay to customers who deposit

money with them

Loan interest rate or credit interest rate: the interest rate that borrowers pay to bankswhen they borrow money Depending on the form of the loan (secured loans, unsecuredloans, installment loans, etc.), the interest rate will vary

Bank discount rate: applied when an individual applies for a loan in the form ofcommercial paper or other valuable documents, calculated as a percentage based on theface value of the commercial paper and deducted when the customer receives the loan

amount.

Refinance interest rate: The central bank applies this rate to commercial banks when

they lend money in the form of short-term commercial paper or valuable documents thathave not yet reached maturity

Interbank rate: This is the interest rate set by the central bank based on the proportion

of capital utilization and the development of the market, and is used to determine theinterest rate between banks

Based on the real value determined by the value of the loan:

Nominal interest rate: This is the interest rate calculated based on the nominal value,

excluding the impact of inflation (Nominal interest rate = Real interest rate + Inflationrate)

Real interest rate: The interest rate adjusted based on the nominal interest rate and theinflation rate

c Based on the flexibility of the interest rate:

Fixed interest rate: The interest rate will not change throughout the loan or savingscontract period This interest rate is determined in the loan or savings contract and doesnot change when the market fluctuates

Floating interest rate: The interest rate can increase or decrease depending on themarket interest rate during the credit period Borrowers benefit from a decrease in theinterest rate, but are exposed to risks if all banks increase the interest rate

d Based on the currency of the loan:

Domestic interest rate: applies to deposits and loans in VND.

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— Foreign currency interest rate: applies to deposits and loans in foreign currencies (USD,

JPY, AUD )

The functions of interest rates

Interest rates play a critical role in the functioning of the financial system and the broadereconomy Understanding their functions can help individuals make informed financialdecisions and policymakers to achieve their economic goals The functions of interest ratesare numerous Interest rates facilitate capital allocation, directing it towards its mostproductive uses In turn, this promotes economic growth and development Additionally,central banks influence interest rates in order to can control inflation by adjusting the cost

of borrowing and lending When interest rates are high, it becomes more expensive toborrow, reducing consumer and business spending and slowing down inflation In contrast,when interest rates are low, borrowing becomes more accessible, which can stimulateeconomic activity Interest rates also influence exchange rates When a country has a higherinterest rate than other countries, its currency becomes more attractive to investorsseeking higher returns Therefore, a high-interest rate can increase demand for a currencyand cause its value to appreciate Conversely, a low interest rate can make a currency lessattractive to investors, which can lead to depreciation Lastly, interest rates can be used tostimulate or slow down economic growth Lower interest rates can encourage borrowing

and spending, which can stimulate economic activity, while higher interest rates can havethe opposite effect The government and central banks use interest rates as a monetary

policy tool to achieve their economic goals Research will further explore the roles andfunctions of the following two types of interest rates

Refinance Interest Rate

Refinance interest rate is the interest rate that the central bank applies to refinancing

transactions for commercial banks The central bank carries out this support to ensure

regular activities for commercial banks in need

According to the provisions of the State Bank of Vietnam Law 2010 Article 11, refinancing isdefined as follows: "Refinancing is a form of credit provided by the State Bank of Vietnam toprovide short-term funds and payment means for credit institutions."

Commercial banks are not always able to ensure that they have enough funds to meet thedemand of depositors and borrowers Thanks to the central bank's refinancing activities,

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commercial banks are able to maintain stable operations The interest rate charged onrefinancing loans is called the refinance interest rate.

Interbank Rate

Interbank Rate is the interest rate at which banks borrow from each other through theinterbank market when they lack reserves at the central bank The State Bank of Vietnamregulates that each commercial bank must maintain a required reserve ratio If a bank fallsshort of this ratio, it must make up the difference according to regulations The purpose ofthis requirement is to ensure liquidity for the banking system.

Continuous trading activities at banks cause fluctuations in the cash reserve amount.Therefore, at the end of the day, some banks may have a shortage of reserves At this point,banks will borrow from each other to make up for the shortage

In fact, the Interbank Rate is similar to the interest rate on other loans The borrowing partymust pay the lending party an interest rate at a certain percentage The maturity ofinterbank loans is usually very short It can last only overnight or for a week, a month, etc

2.1.2 Overview of stock market

2.1.2.1 Definitions

Securities

Securities is acommon name for certificates that can be converted into money For examplestocks, bonds, fund certificates or a special commodity, representing a financial value aresecurities Securities can be in the form of journal entries, certificates or electronic data Forsecurities such as shares, a person who owns shares of a company will be a part owner ofthat company For equity securities, namely shares, a person who owns shares of acompany is a partial owner of that company For debt securities such as bonds, a personwho owns a company's bonds is a creditor of that company The purpose of issuingsecurities is to raise capital for businesses and the government.

Stock market

A stock market is a place where investors go to trade equity securities (e.g., shares) issued

by corporations Investments in the stock market are made mostly through stock exchanges

or stockbrokers and electronic trading platforms

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There are two types of stock market: primary stock market and secondary stock market.The primary stock market is a place where a company's shares are first issued for thepurpose of attracting capital and mobilizing capital from investors on the stock market Themajority of buyers in the primary market are large institutions or mutual funds Thesecondary stock market is where shares are bought and sold after the primary issue In thesecondary stock market, investors will conduct transactions with each other, resulting in achange in the ownership of shares between buyers and sellers.

2.1.2.2 Characteristics And Functions Of The Stock Market

Characteristics Of The Stock Market

The first feature is a direct form of finance, with no financial intermediaries between the

supply and demand for capital In the stock market, companies who need capital and thosewho provide capital directly participate in the stock market without financialintermediaries

The second characteristic of the stock market is continuity First, in the primary market,securities were issued Then, on the secondary market, those securities will be bought andsold over and over again Thanks to the stock market, investors can convert their securitiesinto cash

The third characteristic of the stock market is that it is very competitive Everyone who

wants to buy, sell and trade securities is free to participate in the market Stock prices arenot imposed The price here is determined based on the interaction between supply anddemand of the seller and the buyer.

The fourth feature of the stock market is the openness and transparency of financialtransactions As a result, all participants have detailed and specific information about thestock price being traded on the market Thus helping investors to trade freely andeffectively

The fifth characteristic of the stock market is liquidity This is the reason why it is attractive

to investors Based on supply and demand, investors conduct free and transparentsecurities trading, thereby easily converting the securities they own into cash

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Functions Of The Stock Market

The stock market has five main functions, including mobilizing investment capital for theeconomy, providing an investment environment for the public, creating liquidity forsecurities, evaluating business performance, and acting as an enabling environment for theGovernment to implement macroeconomic policies

a/ For the general economy

The stock market help allocate capital to productive uses, thus promoting economic growth.The stock market for the economy is the "barometer" of the economy The stock market cansignal the outlook for the economy in the next period If stock prices rise, it normally sendspositive signal about the economy On the contrary, it will not bode well for the future

economic situation We can see in history, in 1929, the stock market crashed leading to the

Great Depression of 1930 The third function of the stock market for the economy is tocontribute to the equitization of state-owned enterprises The fourth function of the stockmarket for the economy is that the stock market, together with the bank credit system, hascreated a balanced and efficient capital market to help the economy develop

b/ For enterprises

The first function of the stock market for businesses is to help businesses attract capitalthrough the issuance of shares As a result, enterprises can directly mobilize capital to

develop their businesses In order to be listed on the stock exchange, businesses must have

more credibility with the public, and thus stocks are also more liquid Thanks to the capitalmobilized from the stock market, businesses with cheap, flexible and cost-effective capitalsources bring greater profits to businesses Currently, the mechanism of liberalizing thestock market also helps domestic businesses attract more capital in the internationalmarket, increase international competitiveness and expand business opportunities Thesecond function of the stock market for enterprises is to measure the value of enterprises in

a comprehensive and accurate way through the stock price on the stock market Looking atthe stock value of a business, we can see how well that business is performing now and inthe future It can be said that the high or low value of a company's stock is reflected in itsability to operate effectively, thereby bringing profits to its shareholders

From there, enterprises need to come up with solutions to save production investmentcosts in a reasonable way, improve production and business activities, in order to achieve

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the goal of maximizing corporate value The stock market helps to create a healthy

competitive environment among businesses

c/ For investors

For investors, the stock market offers a wide variety of investment products The choice ofdiversification of securities helps investors earn profits and minimize risks Based on theability, goals and preferences of each person, investors can choose stocks issued bycompanies different in terms of industries, sizes, levels of risks etc.

Currently, under the development of information technology, participating in the stockmarket is very simple and suitable for all types of investors, from small investors to wealthyinvestors and institutional investors Compared to other safe investment channels such as

bank savings, investing in the stock market can help investors generate higher returns

2.1.2.3 Stock Market IndexThe stock market in Vietnam has various kinds of indexes that function as benchmarks tohelp investors assess the overall performance of the market and particular sectors The VN-Index is the most recognized index and uses the market capitalization of all listedcompanies on the HOSE Meanwhile, the HNX-Index is the primary index for the Hanoi StockExchange and reflects the performance of companies listed on that exchange The VNXALL-

Index is a composite index that represents the performance of all listed companies on boththe HOSE and HNX exchanges Furthermore, the VN 30 Index, VNMid-Cap Index, and VN

Small-Cap Index track the performance of specific groups of companies based on theirmarket capitalization These indexes are significant in guiding investors in making informeddecisions about investing in the Vietnamese stock market

The VN30 index was established by HOSE and started to be used from 02/2012 The VN30Index includes 30 stocks with the largest market capitalization and liquidity listed on the

Ho Chi Minh Stock Exchange (HOSE) This group of 30 stocks dominates and accounts for

80% of the total market capitalization and 60% of the total trading value on the Vietnamese

stock market

According to regulations, HOSE will change the basket of stocks in the VN30 index every 6months in January and July every year Accordingly, the stocks that do not meet therequirements will be excluded from the VN30 basket and other stocks that meet therequirements will be replaced The stocks selected to be included in the VN30 basket must

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meet the conditions for participating in the index calculation and be screened on threeaspects: market capitalization, free circulation and liquidity In which, the top 30 stocks thatmeet the screening criteria will be selected to be included in the VN30 basket.

In order to calculate the VN30 index, the following formula is usually applied:

Current Market Cap Value (CMV)

n: number of stocks in the index basket

pj; : Price of stock I in the basket at the time of calculation

s;: The outstanding volume of stock i at the time of calculation

f¡: Free float of stock i at the time of calculation

c¡: Coefficient of limiting the capitalization of stock i at the time of calculation

- Base market capitalization (BMV): In case CMV fluctuates, BMV will be adjusted to ensurethe continuity of the index

2.2 Literature review

Up to the present time, there are many research topics related to understanding therelationship between interest rates and stock indexes, but there is not a commonconclusion for this research topic, because the author The impact of exchange rates on stockindexes is different from country to country or from time to time with or without anexchange rate impact on the index Here is a summary of some empirical studies, to get anoverview of the research methods and possible outcomes in the relationship betweenexchange rates and stock indexes

2.2.1 Overview of foreign studies

Salah Uddin & Mahmudul Alam (2010) research the impact of Interest rate on stock market

with the empirical evidence from Dahaka stock exchange (DSE) The sample includes 146

monthly observations for interest rate and share price monthly observation of “Dhaka StockExchange Index” from the period of May 1992 to June 2004 As representative of interestrate data, bank deposit rate is used because deposit rate usually refers to rates offered to

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resident customers for demand time or savings deposits It’s found that Interest rate hassignificant negative relationship with Price of stock market and Growth of interest rate alsohas significant negative relationship with Growth of Share price Guangtong Guy and hisassociates (2021) have the same conclusion when they study about time-varying influence

of interest rates on stock returns, which selects a sample of 158 monthly stock return datasets (CSI 300 index) from January 2005 to February 2018 Empirical results indicate that onaverage, China stock market returns are significantly negatively correlated with interestrates Similar to that, AAMD Amarasinghe (2015) examined the causal relationship betweenstock price and interest rate, using monthly data for the period from January 2007 toDecember 2013 All Share Price Index (ASPI) in Colombo Stock Exchange is used for the

stock prices and the interest rate have been collected from the data released by the Central

Bank of Sri Lanka The Granger Causality test was used to check any causal relationshipbetween stock returns and interest rate and outcomes showed that interest rate doesGranger Cause stock returns Hinaunye Eita (2014) analyzes the causal relationshipbetween interest rate and stock market return in Namibia for the period 1996 to 2012, inwhich treasury bills rate represent variable interest rates by using cointegrated vectorautoregression methods, it is found that there is a negative relationship between stockmarket returns and interest rates in Namibia Causality test indicates that there is bi-

directional causality between stock market returns and interest rate in Namibia The resultssuggested that contractionary monetary policy through higher interest rate decreases stock

market returns in Namibia Utilizing the ARDL model for checking the short run and thelong run association between interest rate and stock returns of Shenzhen stock exchangefrom January 2008 to December 2018, the data were gathered from the Federal ReserveBank of ST Louis Kamran Khan (2019) found out the result similar to these studies above.Wakilat Balogun and other authors (2016) examines the long run impact of interest rateliberalization on stock market development in the seven selected sub Saharan Africancountries using panel data from 1990-2013, which sourced from World DevelopmentIndicators 2015 The study uses the technique of Pooled Mean Group (PMG) and revealsthat on the average liberalizing the interest rate has a negative long run impact on thedevelopment of interest rate

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Besides, there are still other research results on the impact of interest rates on the stockmarket in general J.P.Gupta & Alanin Chevalier (2001) examines the relationship betweenthe interest rate, exchange rate and stock price in the Jakarta stock exchange (JSX) Thestudy was conducted for a five year period from 1993 to 1997 which was divided into threesub periods The overnight Interbank Rate is taken as the representative of the interest rateand weekly closing market index which is used as the indication of the stock pricefluctuation at the JSX The study reveals that interest rate and stock price are independentseries for most of the time even though there is indication of some causality relationship

running from stock price to the interest rates Henry M K Mok (1992) came to a similar

conclusion by using ARIMA approach and verified by Granger causality test examined the

causality of daily interest rate, exchange rate and stock prices in Hong Kong for the period

1986 to 1991 The result concluded that the HIBOR (Hong Kong Interbank Rate) and theprice indices are independent series Zohaib Khan & Sangeen Khan (2012) examine theimpact of three macro variables: interest rate, exchange rate, inflation on stock return ofKSE 100 index The data of 6 month treasury bill rate is selected from the website of statebank of Pakistan in the period 2001 to 2010 using as interest rate to analyze The resultconcluded that Interest rate and inflation have insignificant impact on stock returns of KSE

100 Addo & Sunzuoye (2013) who examine the joint impact of interest rates and on stock

market returns on Ghana Stock Exchange over the period between January 1995 and

December 2011 using Treasury bill rate as a measure of interest rate The JohansenMultivariate Cointegration Model and Vector Error Correction Model were used toestablish that there is cointegration between Interest rate, Treasury bill rate and stockmarket returns indicating long run relationship On the basis of the Multiple RegressionAnalysis (OLS) The results show that Treasury bill rate and interest rate both have anegative relationship with stock market returns but are not significant We can see moreclearly that the impact of interest rates on the stock market is different in each country in

the Alam & Uddin (2009) show empirical relationship between stock index and interest rate

for fifteen developed and developing countries- Australia, Bangladesh, Canada, Chile,Colombia, Germany, Italy, Jamaica, Japan, Malaysia, Mexico, Philippine, S Africa, Spain, andVenezuela The sample includes fifteen countries’ monthly observations from January 1988

to March 2003 The data “Stock Exchange Index” is taken from International FinancialStatistics (IFS) As representative of interest rate data, Bank Deposit Rate is used because

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deposit rate usually refers to rates offered to resident customers for demand time orsavings deposits In conclusion, it is found that in Malaysia Interest Rate has no relationwith Share price but Changes of Interest Rate has negative relationship with Changes ofShare Price In the case of Japan, it is found that Interest Rate has positive relationship withShare price but change of Interest Rate has negative relationship with change of SharePrice Four countries like Bangladesh, Colombia, Italy, and S Africa show a negativerelationship for both Interest Rates with Share price and Changes of Interest Rate withChanges of Share Price Eight countries like Australia, Canada, Chile, Germany, Jamaica,Mexico, Spain, and Venezuela have significant negative relationships between Interest Ratesand Share price but no relationship between change of Interest Rate and change of Share

Price.

2.2.2 Overview of domestic studies

Nhu Quynh & Huong Linh (2019) examine the impact of some macroeconomic factors onstock price Index in Vietnam, the collected research data is monthly time series data for theperiod 12/2000 to 12/2018 By using the VECM model, the results show a positivecorrelation between inflation and VNIndex and a negative correlation between interestrates and the index in the long run For short-term periods VN-Index has a positiverelationship with interest rates, money supply and oil prices and a negative relationshipwith inflation and exchange rates Similar conclusions in the short-term impact of the abovestudy, Thu Thuy & Thuy Duong (2015), study the impact of six macroeconomic factorsincluding: inflation (represented by consumer price index), interest rate, money supply M2,exchange rate VND /USD, the value of industrial output and foreign direct investment to thestock price indexes being applied at the Ho Chi Minh Stock Exchange (HOSE) In which, the

interest rate used is the average of 1-month interbank interest rates of the days of the

month Data source from the website of the State Bank, by using the method of running theregression model, obtained the results with the significance level of 5% and in the conditionthat other factors are constant, we can see that the interest rate has a positive impact onstock price indexes such as VNIndex Binh and Anh (2018) examined the relationshipbetween interest rates and stock prices in Vietnam using quarterly data from 2008 to 2017.They employed a fixed effects model and panel data analysis to estimate the impact ofinterest rates on stock prices, they found that interest rates have a significant negative

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impact on stock prices, with a one-percentage-point increase in interest rates leading to a0.33% decrease in stock prices They also found that the impact of interest rates on stockprices is more pronounced in the long run Yen and Son (2014) studied the development ofthe Vietnamese stock market under the influence of macroeconomic factors Theobservational sample was collected between January 2007 and December 2012 Afterrunning a VECM model, the authors concluded that macroeconomic factors impact on stockmarket, specifically interest rates had an inverse correlation with the stock market Loc andHien (2011) studied the fundamental factors influencing the stock pricing decisions of

individual investors in the Vietnamese stock market The study was conducted by

administering a direct survey questionnaire to investors in the stock market in Ho Chi Minh

City between November 2009 and December 2009 Exploratory Factor Analysis (EFA) was

used to identify underlying factors that affect the pricing process of investors The authorsconcluded that interest rates are also a fundamental factor that strongly influences stockprices, with 73.9% of investors believing that stock prices will rise when interest rates fall

2.2.3 Research Gap

There is a research gap regarding the impact of interest rates on the stock market inVietnam This gap pertains to the investigation of various types of interest rates that canaffect stock prices These could include the interbank rate, the refinance interest rate, and

others Another area that requires exploration is the relationship between interest rates

and different sectors of the stock market in Vietnam It is plausible that fluctuations ininterest rates may have a more substantial influence on specific industries, such as banking

or real estate, compared to others Furthermore, due to Vietnam's distinct economic,

political, and social environment, the effect of interest rates on the stock market maydifferent from that in other countries

This research will extensively analyze the impact of specific interest rate types, namely theInterbank Rate and Refinance Interest Rate, to examine the effects of these two interestrates on changes in the VN30 stock index

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CHAPTER 3: RESEARCH METHODOLOGY

3.1 Overview of VECM Model

This study using VECM model to examine the impact of interest rate on stock index of the

Ho Chi Minh Stock Exchange

VECM or Vector Error Correction Model, is a type of time series model used in econometrics

to analyze the long-run relationships among economic variables It was first introduced bySöderström (1983) and then later formalized by Johansen (1988) VECM models are used to

analyze the dynamic relationships among multiple time series variables by decomposing

the short-term and long-term effects of the variables on one another This model isespecially useful when the variables in question are non-stationary and have a cointegratedrelationship, as it can account for both the short-term and long-term deviations fromequilibrium VECM is often used in financial and macroeconomic research to analyze thebehavior of economic variables such as exchange rates, inflation rates, and interest rates

Step by step to run the model:

(1) Stationarity test: Conduct Augmented Dickey-Fuller (ADF) tests on each variable to

determine their stationarity properties (2) Selecting Lag k (3) Cointegration test: Use theJohansen cointegration test to determine the existence of a long-run relationship betweenthe variables (4) VECM specification: Construct a VECM with the identified cointegratingrelationship (5) Granger causality test: Conduct Granger causality tests to determine thecausal relationship between the variables (6) Variance decomposition analysis: Use thevariance decomposition function to determine the proportion of forecast error variance ofeach variable (7) Policy implications: Discuss the policy implications of the research

findings and provide recommendations for policymakers

Overall, the VECM model is a powerful tool for analyzing the long-run relationship betweenmultiple variables in an economic system It provides insights into the dynamic interactionsbetween the variables, which can inform policy decisions and contribute to a deeperunderstanding of the economy

3.1.1 Stationality and stationarity test

a/ Definition of Stationarity

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According to Gujarati (2003), a time series Yt is considered to be stationary if its expectedvalue and variance are constant regardless of when the series is observed Moreover, thecovariance between E (Yt) = p (Vt)two time periods depends only on the time lag k betweenthem, and not on the actual time when the covariance is calculated.

In other words, a time series Yt is stationary if it satisfies the following conditions:

- The expected value is constant over time:

Cov(Yt, Yt+k)= E[Yt - E (Yt)] x [Ytek - E (Yk) ]

= E(Y: - uw) x (Ye - H)

= Yk

* If any of the above conditions are violated, the time series Yt is considered to be

non-stationary.

b/ Consequences of non-stationary time series

In classical regression models, it is assumed that the variance is constant, the random errorhas a zero mean, and there is no correlation between the variables Assuming that the data

is a non-stationary time series, the t-tests, F-tests lose their effectiveness, the estimationand prediction become ineffective, and therefore the OLS method cannot be applied to non-

stationary series.

A clear consequence of non-stationary time series is the phenomenon of spuriousregression or nonsense regression This occurs when the model has at least oneindependent variable that has the same trend as the dependent variable, resulting in a veryhigh coefficient of determination R? after model estimation However, this may be aspurious result because R? can be influenced by many factors such as the two variableshaving the same trend, not necessarily because they are highly correlated

In reality, the majority of time series are non-stationary Therefore, determining whether a

time series is stationary or not is very important to avoid such consequences There are

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