Khóa luận tốt nghiệp: The impact of the derivatives market on the underlying stock market: the case of the VN30 Index

As the financial market develops, the underlying assets of derivatives become increasingly diversified and complex, including stock index futures contracts.. Stemming from practical issu

UNIVERSITY OF ECONOMICS AND BUSINESS

VIETNAM NATIONAL UNIVERSITY

GRADUATION THESIS

THE IMPACT OF THE DERIVATIVES MARKET ON THE UNDERLYING

STOCK MARKET: THE CASE OF THE VN30 INDEX

Hanoi - April 2023

UNIVERSITY OF ECONOMICS AND BUSINESS

VIETNAM NATIONAL UNIVERSITY

GRADUATION THESIS

THE IMPACT OF THE DERIVATIVES MARKET ON THE UNDERLYING

STOCK MARKET: THE CASE OF THE VN30 INDEX

LECTURER : PhD Nguyén Thi Nhung

STUDENT : Nguyén Xuan Hao

STUDENT CODE : 19050650

CLASS : QH2019E-TCNH CLC 1

Hanoi - April 2023

I hereby declare that this thesis is my own personal research work, not copied from

anyone else because I have researched, read, translated, compiled, and performed underthe guidance of lecturer PhD Nguyen Thi Nhung For the thesis's theoretical content, I

used some references as presented in the references section The data, software program and results in the thesis are honest and have not been published in other works.

First and foremost, I would like to express my sincere gratitude to my thesis advisor,

Dr Nguyen Thi Nhung With her enthusiastic guidance and suggestions throughout theentire process, I was able to complete this dissertation

I would also like to thank the faculty and staff of the University of Economic and Business, Vietnam National University, especially Faculty of Finance and Banking, who

provided me with the necessary resources, knowledge, and opportunities to pursue myacademic knowledge and gain practical experiences Although my graduation thesis is not

completely accomplished, I believe it will be a stepping stone for my future career.

Thank you sincerely!

LIST OF TABLES

No Name Page

Table 4.1 Features of VN30 stock index futures contract 38

Table 4.2 Descriptive statistics of data 41

Table 4.3 Optimal lags of pairs of variables in each period 43

Table 4.4 Trace va Max-Eigenvalue test between VN30 Index and 43

50

Figure 4.2 | Stability Diagnostics

TABLE OF CONTENTS

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CHAPTER 1: INTRODUCTION

1.1 Introduction

The derivatives market was born out of the need to hedge risks in the agricultural

sector As the financial market develops, the underlying assets of derivatives become

increasingly diversified and complex, including stock index futures contracts According

to Le et al (2020), the derivatives market has three main roles: (i) the role of setting spotprices; (ii) the role as a risk management tool; and (iii) the role of cutting costs andincreasing investment efficiency However, over the years, derivatives have faced manyallegations of negative effects on the underlying market This is also why the relationshipbetween the derivatives market and the underlying stock market is of interest to many

scholars.

In Vietnam, the derivatives market was officially launched on August 10, 2017, with

VN30 index futures contracts as the first derivative product With this event, Vietnambecame the fifth country with a derivatives market in the ASEAN region, after Singapore,Malaysia, Indonesia, and Thailand From July 2019 to July 2021, the derivatives marketadded two more products: 5-year government bond futures contracts and 10-yeargovernment bond futures contracts However, these two products are only available toinstitutional investors After nearly six years of operation, the derivatives market hasshown to be an investment channel and a hedging tool for the underlying securities Thenumber of derivatives trading accounts is increasing However, this activity also revealssome limitations, such as the mechanism of charging overnight fees when trading on thederivatives market stimulating investors’ intraday turnover, making a hedging market,risk management, and a highly speculative market, betting on price movements

Most recently, in May 2022, the VNINDEX index decreased by more than 20% invalue from 1,500 points to more than 1,200 points Many believe that the market wasstrongly affected by transactions on the derivatives market when securities codes weremassively sold at the ATC session simultaneously Securities companies continuouslyrecommended investors to short-sell So, is the underlying stock market genuinelyaffected or manipulated by large-scale derivatives trading?

Stemming from practical issues, the research “The impact of the derivatives market

on the underlying stock market: the case of the VN30 Index” aims to assess the impact

of futures contracts on the underlying securities market and based on the analysis,propose necessary solutions and recommendations to limit the risks that may occur

the underlying stock market to further promote the sustainable development of both

markets

1.2 Research objectives and tasks

The thesis has the objective of analyzing and assessing the impact of the derivatives

market on the underlying security In addition, based on the study of internationalexperience in operating the derivatives market, the thesis proposes a number of solutions

to limit the risks that may occur during the development of the derivatives market, reduce

its negative impacts on the underlying securities market to further promote thesustainable development of the market Vietnam Stock Exchange

1.3 Research Questions

- What is the impact of VN30 index futures contracts on VN30 Index ?

- What are the solutions and recommendations needed to limit the risks that mayoccur during the development of the derivatives market, reduce its negative impacts onthe underlying securities market to further promote the sustainable development of bothmarkets ?

1.4 Subjects and scope of research

1.4.1 Subjects of study

The derivatives market, the underlying securities market in Vietnam, and the impact

of the derivatives market on the underlying securities market

1.4.2 Scope of research

° Spatial Range

The study only focuses on the VN30 index for the reason that it is the group of 30stocks with the largest market capitalization and represents 70-80% of the total marketcapitalization, in other words, the VN30 index and VN30 index are highly representative

of the Vietnamese stock market Thus, the study will assess the impact of the VN30contract on the VN30 index using the VECM method

° Time range

2019-2022 and divided into 3 main phases sideways phase (01/2019 to 03/2020);growth period (03/2020 to 06/2021); recession period (06/2021 to 12/2022)

1.5 Research methodology

1.5.1 Data collection method

The study used secondary data collected from data published on financial websites

1.5.2 Data analysis

Using qualitative methods in combination with quantitative VECM modeling Thecollected data will be fed into Eviews 8 software to conduct analysis and evaluation,comparison over the years

1.6 Structure of the study

The content consists of 5 chapters:

Chapter 1: IntroductionChapter 2: Literature review and theoretical framework on derivative market and

underlying security marketChapter 3: Research method and proposed modelChapter 4: Impacts of the derivatives market on the underlying stock market: the

case of the VN30 Index

Chapter 5: Discussions and recommendations

CHAPTER 2: LITERATURE REVIEW AND THEORETICAL BASIS OF THE IMPACTS

OF DERIVATIVE MARKET ON THE UNDERLYING STOCK MARKET

2.1 Literature overview about the impacts of derivative market on the underlyingstock market

2.1.1 Overview of foreign research

In the world, the derivatives market is of interest to many scholars, some researchresults have shown the effects and relationships between the derivatives market and theunderlying stock market

Chung's research, conducted in 2014, focused on exploring the impact of derivativeshedging on the spot market Specifically, the study analyzed the exact hedging ratio ofsecured warrants traded at the Taiwan Stock Exchange By examining this specific type of

derivative and its impact on the market, Chung's research aimed to provide insights into

the broader relationships between derivatives trading and the underlying securitiesmarket The findings of the study were significant, indicating that abnormal profits andtrading volumes were closely correlated before the announcement date of the warrant

issuance This relationship demonstrated the strong connection between the fluctuation

of a stock's earnings and the price elasticity of hedging demand The results of the study

provided evidence to support the idea that hedging demand can be influenced by a stock'searnings, which in turn affects the overall price dynamics of the underlying securitiesmarket Additionally, Chung's research found that there was a strong negative impact onthe underlying securities market when purchase warrants expired in a profitable state.This finding highlighted the potential risks associated with derivatives trading and theimportance of understanding the impact of such trades on the broader market Overall,Chung's research provides important insights into the complex relationship betweenderivatives trading and the underlying securities market By examining the exact hedgingratio of secured warrants traded at the Taiwan Stock Exchange, the study sheds light onthe impact of derivatives hedging on the market, the role of earnings in influencinghedging demand, and the potential risks associated with such trades

Malim and Halim (2017) aimed to investigate the impact of derivatives on Malaysianstock market volatility using the Spontaneous Conditional Change Variance Model(GARCH) The study provided valuable insights into the relationship between thederivatives market and the spot market, particularly in terms of the risk transformation

stock market by reducing its volatility This finding suggests that futures trading plays a

crucial role in transforming risk, as it allows investors to hedge their positions and

manage their exposure to market fluctuations more effectively Moreover, the studydemonstrated that futures trading can improve the efficiency of the Malaysian stockmarket by reducing volatility in the spot market This is because futures trading providesinvestors with a mechanism for hedging their positions in the spot market, therebyreducing the level of risk associated with investing in the market The results of the studyalso have important implications for investors in the Malaysian stock market Byproviding a mechanism for hedging their positions and managing their exposure tomarket volatility, futures trading offers investors a valuable tool for reducing their riskand improving their returns Overall, Malim and Halim's study provides valuable insights

into the impact of derivatives on the Malaysian stock market, highlighting the risk

transformation role of futures trading in reducing volatility and improving the efficiency

of the spot market The study's findings have important implications for investors andpolicymakers, as they suggest that derivatives trading can play a crucial role in managing

risk and improving market performance Some studies delve into lag analysis between

impact links between the two markets

Wang et al (2017) examined the relationship between the spot market and futures

market of the CSI 300 index from 2010 to 2014 using high-frequency trading data The

study's findings revealed that frequent trading in the derivatives market caused pricemovements to occur faster than in the stock market, which accelerated the assimilation

of information in the market This suggests that the derivatives market can react tomarket news faster and more efficiently than the spot market One of the reasons for thisfaster reaction time is that institutional investors are more active in the derivativesmarket than individual investors, who are the main participants in the stock market.Institutional investors have access to more resources and information, which allows them

to react more quickly to changes in the market Furthermore, the high degree of leverage

in the derivatives market partly explains why index futures are ahead of stock indices inreacting to market news Investors can use leverage to increase their exposure to themarket and potentially generate higher returns This ability to amplify gains and lossesthrough leverage makes the derivatives market a more sensitive indicator of marketsentiment than the stock market Another key factor that contributes to the derivativesmarket's faster reaction time is the ability to short-sell futures contracts, which is

prohibited in the spot market Short selling allows investors to protect their ownership

and react more quickly to market news, as they can profit from declines in the market.

This ability to sell short also allows investors to take advantage of arbitrage opportunities

and help to keep prices in line between the spot market and futures market Overall, Wang

et al.'s study provide valuable insights into the relationship between the spot market and

futures market of the CSI 300 index, highlighting the faster reaction time of the derivatives

market, the influence of institutional investors, and the impact of leverage and shortselling on market dynamics These findings have important implications for investors andmarket regulators, as they suggest that derivatives trading can play a crucial role inmanaging risk and improving market efficiency

Ren (2019) provides a comprehensive analysis of the lag relationship between theSSE 50 stock index and futures and options contracts in the Chinese stock market using

the TOP method, a non-parametric method The study also compares the results with two

developed markets, the Hong Kong stock market, and the United States Interestingly, thestudy found that the lag relationship between the derivatives market and the stock marketvaried significantly across the different markets In the US and Hong Kong stock markets,

the futures index led the underlying stock index, while the option contract index led the

futures index when the general market index was stable or in an uptrend, but vice versa

in a downtrend In mainland China's stock market, the general market index and options

index led the futures index in all periods within the scope of the study This unique finding

suggests that the Chinese derivatives market may have a different price discoveryfunction compared to the derivatives markets of other developed countries Moreover,the study also found that in all three markets, the options index leads the overall marketindex during sideways market phases or in an uptrend, but reverses when in a downtrend.This finding highlights the importance of understanding market conditions whenanalyzing the lag relationship between the derivatives market and the stock market Thestudy's results suggest that the latency relationships between the derivatives market andthe stock market are unique in each market and subject to different market conditions.These findings have important implications for investors and market regulators, as theyhighlight the need for a tailored approach to analyzing derivatives markets in differentcountries and market conditions Overall, Ren's study provides valuable insights into theprice discovery function of derivatives markets in different countries and marketconditions The study's findings underscore the importance of understanding the unique

Kim (2017) delves into investigating the potential lead/lag relationship between

returns and the timing of neutral risk density (RND) in the Korea Composite Stock Price

Index (KOSPI) 200 spot, futures, and options markets The study is crucial as it tries tounderstand the potential causal effect between these two variables and how they interactwith each other The empirical analysis conducted in the study reveals that there is a two-way correlation between returns and the timing of neutral risk density (RND) in theKOSPI 200 spot, futures, and options markets This finding is essential as it shows thatboth variables have an impact on each other, and they may potentially cause a ripple effect

on the entire market Moreover, the study also finds that the degree of influence on latency

is stronger when the specific market is in a bear or bullish market This observation iscrucial because it highlights the importance of market conditions when analyzing the

relationship between these two variables The study's findings have significant

implications for investors and market regulators, as they underscore the need for atailored approach to analyzing the Korean stock market's derivatives markets Thestudy's results suggest that investors and regulators should take into account the market

conditions and the relationship between returns and the timing of neutral risk density

(RND) when making investment decisions or setting market policies Furthermore,understanding the causal relationship between returns and the timing of neutral risk

density (RND) in the KOSPI 200 spot, futures, and options markets can help market

participants identify potential risks and opportunities in the market By analyzing thelead/lag relationship between these two variables, investors can make more informedinvestment decisions, while regulators can develop more effective market policies toimprove market efficiency and stability In conclusion, Kim's study provides valuableinsights into the potential causal relationship between returns and the timing of neutralrisk density (RND) in the KOSPI 200 spot, futures, and options markets The study'sfindings highlight the importance of market conditions and the need for a tailoredapproach to analyzing derivatives markets in different countries and market conditions

In the study conducted by Kavussanos (2008), the examination of the relationshipbetween cash and futures indices of the Greek stock market revealed interesting findings.The empirical analysis showed that there is a bidirectional relationship between cash andfutures prices However, the futures market was found to drive the returns of the cashindex, reacting more swiftly to economic events than stock prices This finding highlightsthe notion that the futures market has a significant role in the price discovery process and

can provide useful information for investors to make informed decisions Furthermore,

the research also highlighted that the speed of information dissemination in the futures

market is much faster in a liquid market than the FTSE/ATHEX-20 This implies that the

futures market has the potential to provide a more efficient pricing mechanism in a liquidmarket, contributing to the maturation and stabilization of capital markets in Greece The

study also found that fluctuations in futures contract prices transmitted information to

corresponding cash market movements in both futures markets investigated However,the volatility of the cash market did not affect the volatility of the futures market Thisindicates that the futures market is more sensitive to market information than the cashmarket, and investors can use the futures market to hedge against volatility in the cashmarket Another important finding of this study was the volume of futures contracts andthe disequilibrium effect between cash and futures The results showed that a high

volume of futures contracts was associated with an increase in the disequilibrium effect

between cash and futures This implies that when there is a high volume of futurescontracts, investors may experience greater risks in the market In conclusion, the studyrevealed that the derivatives market, particularly the futures market, has an important

role to play in providing information for investors to make informed decisions, hedging against market risks, and contributing to the stabilization and maturation of capital

markets

Dong et al (2017) focus on studying the predictable effects of various types ofspeculative activity in the market (intraday speculation, medium-term and long-termspeculation) and their effects future movements of the underlying index Unique in theauthors’ research method is providing a new representation of the level of speculation bydividing traders on the futures market into hedgers and speculators when considering thecorrelation between the futures market and the spot market, the authors (while this isneglected by other studies) From there, the information about this heterogeneousspeculative activity is put into the HAR-RV model to study the impact of different parts(predictable and impactful) of different types of speculative behavior (intraday, medium,and long-term) on the future movements of the underlying index The authors find that

an increase in intraday speculation exacerbates spot market volatility and that an increase

in expectations of long-term value speculation can reduce market volatility butspeculative shocks will exacerbate market volatility Finally, it is suggested that regulatorsshould strictly limit speculative trading during the day, and at the same time focus on

development of the market The market helps to stabilize the abnormal fluctuations of the

market

2.1.2 Overview of domestic research

The derivatives market in Vietnam, which commenced operation in August 2017, is

still in its nascent stages, and hence there is a limited amount of academic literature on

this topic However, there are some researchers who have contributed to this field andprovided valuable insights

Bui (2014) have examined the development and prospects of the Vietnamesederivatives market They have identified the challenges and opportunities that the marketfaces and suggested measures to improve its operation Their study emphasizes the needfor transparency, investor education, and risk management in the market Additionally,

they suggest that market makers and liquidity providers play a crucial role in ensuring

the smooth functioning of the derivatives market

Similarly, Bui and Bach (2018) have focused on the valuation of financial derivatives

in the Vietnamese market They have provided a comprehensive analysis of the

Black-Scholes option pricing model and its application to the Vietnamese context Furthermore, they have explored the use of the Monte Carlo simulation method to price options on

Vietnamese stocks Their research has shed light on the importance of accurate valuation

in the derivatives market and how it can contribute to the overall development of the

Vietnamese financial market

Dao and Nguyen (2019) provide a comprehensive study on the derivatives market andtrading in Vietnam, focusing on the situation of the market in its first year of operation.The study highlights the importance of derivatives markets in a modern economy and theneed for these markets to be well-regulated and supervised The authors begin bydiscussing the general theories and concepts of the derivatives market, including thetypes of derivatives products that are commonly traded, such as futures, options, andswaps The study then moves on to discuss the situation of the derivatives market inVietnam, providing an overview of the first year of its operation The authors identify anumber of positives of the market, including the introduction of new financial products,increased liquidity in the market, and the promotion of risk management for marketparticipants However, the study also identifies several limitations of the market, such asthe lack of transparency, inadequate infrastructure, and insufficient investor education

In response to these limitations, the authors provide specific recommendations forimproving the management and supervision system of the Vietnamese derivatives

market These include strengthening regulatory oversight, increasing transparency and

information dissemination, improving market infrastructure, and enhancing investor

education and protection The study emphasizes the need for a holistic approach to thedevelopment of the derivatives market in Vietnam, which takes into account the interests

of all stakeholders, including market participants, regulators, and investors Overall, thestudy by Dao and Nguyen provides a valuable contribution to the literature on thederivatives market in Vietnam It highlights the potential benefits of these markets for theeconomy, while also identifying the challenges that need to be addressed to ensure theireffective functioning The specific recommendations provided by the authors can serve as

a guide for policymakers and market participants in Vietnam and other emerging marketslooking to develop their derivatives markets

In their study, Nguyen and Tran conducted an in-depth analysis of the trading results

in the derivatives market of Vietnam from 2017 to 2021 They compared the advantagesand disadvantages of participating in the derivatives market versus the underlyingsecurities market The authors examined various factors such as the market liquidity, the

level of trading risk, the returns on investment, and the costs of trading in the derivatives

market The study showed that participating in the derivatives market in Vietnam canbring several advantages over investing in the underlying securities market The

derivatives market provides investors with greater flexibility and risk management tools,

such as futures and options contracts, which allow them to take long or short positions inthe market This can help investors to hedge their positions against potential losses,thereby reducing their exposure to market risk In addition, the derivatives market hashigh liquidity, which enables investors to enter or exit the market quickly and easily.Moreover, the derivatives market offers investors the potential for higher returns oninvestment, as trading in derivatives contracts can be more profitable than trading in theunderlying securities market However, the authors also noted that trading in thederivatives market carries higher risks due to the leveraged nature of the contracts As aresult, investors must be aware of the risks and must have a solid understanding of themarket before investing in it Overall, the study highlights the advantages anddisadvantages of trading in the derivatives market and provides valuable insights forinvestors looking to participate in this market The authors suggest that investors shouldcarefully assess the risks and benefits of trading in the derivatives market before making

The derivatives market in Vietnam has made significant progress since its launch inAugust 2017 However, to ensure its stability and development, it is crucial to learn fromthe experiences of large and long-standing markets worldwide The academic literature

on this topic is limited in Vietnam, but some studies have compared the country's

derivatives market with foreign markets.

One such study is by Vu (2022), who examined the interaction between the derivativesmarket and the underlying market of countries such as Korea, China, and the UnitedStates Through this research, the author outlined the positive and negative links betweenthese two markets, as well as the benefits and drawbacks they bring to each other.Moreover, the study recognized the events of major fluctuations in the markets ofcountries around the world, from which policymakers could learn and develop

management policies to limit the negative impacts between these two markets In parallel

with the underlying stock market, the derivatives market becomes one of the capitalmobilization resources of the Vietnamese economy To learn from the managementsystem and operating models of developed markets in Asia, Vo (2016) studied countries

such as Singapore, Japan, and Korea The author drew lessons from their experiences to lay the foundation for Vietnam's derivatives market in the macroeconomic context,

amidst global financial struggles As Vietnam's derivatives market continues to grow and

mature, it is important to keep exploring and learning from the experiences of other

markets to improve its management and development By doing so, the market canbecome a reliable and effective tool for capital mobilization, investment, and risk

management.

The 2008 global financial crisis has significantly impacted the global economy and thefinancial industry Many countries have faced challenges and difficulties in themanagement and operation of their financial markets In this context, Nguyen & Trinh(2008) conducted a study to explore the nature and application of derivatives in thefinancial industry, with a particular focus on the challenges and problems that need to beaddressed to improve the development of Vietnam's derivatives market The authorsprovided a comprehensive overview of the derivatives market, including its functions,benefits, and risks They also highlighted the major factors that contributed to the 2008

financial crisis, such as the misuse of financial instruments and the lack of effective risk

management strategies Based on this analysis, they identified the challenges thatVietnam's derivatives market might face and suggested possible solutions to address

these challenges The study emphasized the importance of improving the legal framework

and regulatory system for the derivatives market to ensure transparency, fairness, and

stability The authors also suggested enhancing the capacity of market participants,

including investors, brokers, and regulators, to manage and control risks effectively Inaddition, they recommended establishing a comprehensive risk management system to

monitor and evaluate risks in the derivatives market continuously In summary, the study

by Nguyen & Trinh (2008) provides valuable insights into the development of Vietnam'sderivatives market, particularly in the context of the global financial crisis The authors’analysis and recommendations offer practical guidance for policymakers, regulators, andmarket participants to improve the management and operation of the derivatives market,mitigate risks, and enhance its contribution to the economy

In her research, Pham (2019) provided insights into the impact of the derivatives

market on the stock market operations in Vietnam By pointing out the advantages of

exploiting the potential of the derivatives market and its impact on creating a fast andefficient capital turnover, the study emphasizes the importance of promoting liquidity forthe underlying stock market The author analyzed the operating results and liquidity of

the derivatives market in Vietnam through transaction statistics, contracts, and comparison with the markets of Thailand or Taiwan, although she did not use a

quantitative model Moreover, the study proposed complete solutions to promote the

positive effects that the derivatives market brings, taking into account the risks that may

arise from this market The author also addressed concerns about market manipulation,stating that while it is theoretically possible to manipulate prices in the derivativesmarket to affect the underlying market, this is not easy to do in practice because the size

of the market is quite large and is closely monitored by many different departments Thefindings of this study can be beneficial to market participants, policymakers, andregulators in Vietnam, as well as in other countries considering the development of theirown derivatives markets By exploring the relationship between the derivatives marketand the stock market in Vietnam and identifying the factors that affect the performance

of the derivatives market, the research can contribute to the design of a more efficient andtransparent market structure that can promote sustainable economic growth

The impact of derivatives on the underlying stock market is a subject of ongoingresearch, with studies seeking to understand the fluctuations in trading activity and howthey affect the market

market transactions and analyzed the trading volume of VN30F between August 10, 2017,

and January 31, 2019, as well as the profit and volume of VN30 and VNindex for 21 periods

from January 5, 2019, to January 31, 2019 To analyze the data, the researchers appliedthe EGARCH model, which showed a positive impact on the profit of VN30 and VNindex

after the index futures contract appeared Additionally, they found that the liquidity and

trading volume of VN30 index futures contracts increased over time The study alsorevealed that sudden fluctuations in past returns could impact the present, regardless ofwhether they were positive or negative However, the evidence has some limitations asthe study only assessed the impact of index futures contracts during the early period ofthe instrument's appearance Despite these limitations, the study by Nguyen et al (2019)provides valuable insights into the impact of derivatives on the stock market in Vietnam

It highlights the potential benefits of derivatives in terms of increasing liquidity and

trading volume while also acknowledging the challenges associated with suddenfluctuations in market activity The findings of this study can inform policymakers andinvestors as they consider the role of derivatives in the broader financial ecosystem

Further research can build upon these insights and deepen our understanding of the

relationship between derivatives and the underlying stock market

In their study, Nguyen & Truong (2020) examined the impact of index futures on the

profitability and trading volume of the spot market in Vietnam using data from February

6, 2012, to December 31, 2019 The study utilized various models, such as OLS, GARCH(1,1), and EGARCH (1,1) to verify empirical evidence The findings suggest that theinclusion of index futures contracts did not have any significant impact on immediatemarket returns However, the results from the EGARCH (1,1) model indicated that theeffect of leverage on the volatility of the spot market existed in HOSE Specifically, theimpact of bad news on the market volatility was more significant than that of good news

of the same magnitude Moreover, their empirical findings suggested that the introduction

of index futures contracts had a positive effect on the underlying market trading volume.After the index futures contract was put into trading, the trading volume increased by7.5% compared to the period before the introduction of the instrument Finally, the studyconducted a Granger causality test to examine the relationship between spot marketreturns and futures trading activity The test confirmed that there was only one-waycausality from market returns to trading activities in futures contracts existing on HOSE.While the findings of the study provide valuable insights into the effects of index futures

contracts on the Vietnamese stock market, the study also has some limitations For

instance, the study only considered data from a specific period, and therefore, the findings

may not be generalizable to other periods Additionally, the study did not account for

other factors that may influence the market returns and trading volumes, such as politicalinstability or changes in economic policies

Thuy (2021) research on the impact of the VN30 futures contract expiration date onthe Vietnamese stock market sheds light on a critical issue that has significantimplications for investors and traders The author provides a comprehensive analysis ofthe anomaly in trading volume and price movements on the expiration date of themonthly futures contract, focusing specifically on VN30 By using the Wilcoxon test, theauthor compares the differences in trading volume, returns, price movements, andreversals between two groups: one set of expiration dates and another group consisting

of non-maturity comparison dates The findings of the study indicate that the pricevolatility on the expiration date increases significantly compared to non-maturity days,with the volatility getting higher as the time period approaches the expiration time.Moreover, the study finds that there is a strong price movement during the ATC session,

with the profit variance having a volatility three times higher at a 5% significance level These results have significant implications for traders who want to maximize their profits

by trading on the expiration date of the futures contract In addition, the study's findings

can also be useful for policymakers who are concerned about the impact of futures

contracts on the stock market By understanding the anomalies in trading volume andprice movements on the expiration date of the futures contract, policymakers can designregulations to minimize any adverse effects on the market Overall, Thuy's researchprovides a valuable contribution to the literature on the impact of futures contracts onstock markets, particularly in the case of the Vietnamese stock market

2.1.3 Research gaps

The derivatives market has a long and complex history worldwide, with differentregions and countries adopting various approaches to its development and regulation InVietnam, the derivatives market has been in operation for just a few years, startingofficially in August 2017 Its primary goal is to establish itself as a reliable and long-termsource of capital mobilization for the economy As such, many studies in Vietnam havefocused on assessing the market's operations and perfecting its management,organization, and supervision These studies also aim to learn from the experiences and

While some studies have provided practical lessons for the Vietnamese market by

analyzing the impact factors of the derivatives market and the underlying stock market

through practical studies in foreign markets, there is still a gap in quantitative analysis ofthe effects and impacts of these two markets on each other in the context of Vietnam

Given the advent of stock index futures, many researchers have carried out extensive

studies to investigate latency relationships, often using a combination of Granger causalanalysis, test co-bonding, and the VECM model However, such studies have not beenconducted in Vietnam, leaving an opportunity for researchers to contribute to a betterunderstanding of the derivatives market's impact on the underlying securities market

In light of this, a study is proposed to use the vector error correction method to assessand analyze the impact of the derivatives market on the underlying securities market in

Vietnam By doing so, this study aims to offer a number of complete solutions for the

development of a sustainable capital market, which can build the trust of both domesticand foreign investors Such a study can potentially contribute to a better understanding

of the dynamics between the derivatives market and the underlying securities market, as

well as provide insights into ways to improve the market's performance and efficiency in

the long run

2.2 Theoretical basis of derivatives market and underlying securities market

2.2.1, Overview about derivative securities

2.2.1.1 Definition

Derivatives are financial instruments whose value depends on the value of otherassets such as bond prices, stocks, market index values, or non-financial assets, includingcommodities, agricultural products, gold, silver, and more Derivatives are a type offinancial contract established between a buyer and a seller for a transaction at an agreedtime in the future During the existence of the derivative, the value of the derivative is notfixed but moves according to the price movement of the underlying asset The financialmarket is constantly innovating and developing, and derivatives are becoming moreabundant to serve the needs of many different subjects in the market

Currently, there are many methods of classifying derivative securities products,such as according to the transaction method, the nature of the contract, as well asdepending on the underlying asset type, specifically:

According to the form of trading, derivatives can be traded on two markets: one is acentralized market, such as through stock exchanges, and the other is an over-the-counter

(OTC) market Therefore, the derivatives traded through the centralized market are listed

derivatives, and the derivatives traded through the over-the-counter market are OTCderivatives Listed derivatives are agreed upon by competent organizations onregulations and standardization of specific content and terms of contracts Any entityparticipating and wishing to transact can grasp the information and characteristics of

each product but must follow and are not free to modify the existing terms Good examples

of this type of derivative are futures and some standardized options

On the other hand, OTC derivatives are not traded on a stock exchange It consists ofseparate contracts between buyers and sellers Contractual terms are determined by theparties themselves or through an intermediary In contrast to listed derivatives, OTCderivatives are very flexible products that can meet the specific or special wishes of theparties However, there are exceptions, and there are still a few OTC derivatives with veryhigh standardization similar to listed derivatives Typical examples of OTC derivatives areswaps, forwards, and some options

By product, derivatives can be classified into four types: forward contracts, futurescontracts, options contracts, and swaps

2.2.1.2 The role of the derivatives market

a Price setting

The derivatives market is an important source of price information, considered a

useful tool for determining spot prices The spot markets of many assets are chosen as the

foundation for futures contracts that cover a wide range and are geographically dispersed.For example, soybeans and wheat can be traded at many different places and times Notonly that, they are also diverse in quality and type Therefore, there will be a lot of spotprices for the same commodity or asset Typically, the price of a futures contract with thenearest maturity will be considered equivalent to the spot price of the underlying asset

b Risk Management Tools

Since the price of derivative securities is closely related to the price of the underlyingsecurity, they can be used as a tool to mitigate or hedge risks or increase the level of riskincurred when holding the underlying asset Investors have different risk appetites, sosome will be willing to take a higher level of risk than others in order to expect greaterreturns Because these markets are so effective at reallocating risk among investors, noone will be exposed to unwanted levels of risk This is considered the most importantfunction of this market

The derivatives market gives traders certain advantages Typically, the cost oftrading and brokerage in this market is usually lower than in the spot market Next, themarket allows investors to hold positions that yield similar results to short selling in theunderlying market In many countries, including Vietnam, securities market regulators

apply a number of regulations to prohibit or discourage short selling to limit possible risks

for investors and for the whole market This does not apply to derivatives transactions.Moreover, derivatives trading in Vietnam is quite flexible, and can be traded on the sameday instead of having to wait after 3 days when trading on the underlying market

2.2.2 Overview about the underlying stock market

The stock market is the place where trading activities of buying and selling stockstake place and are conducted through stock exchanges or through stock brokeragecompanies In particular, the stock market includes the secondary market and theprimary market The primary market is where shares are first issued by the company toraise investment capital And most of the participants in this market are large institutions

or investment funds Shares issued in the primary market will be bought and sold again

and again in the secondary market Buyers in the primary market will make purchases against other investors in the secondary market Therefore, this will only change the

position of the buyer and seller, and no new source of money will be generated This is

also the place where individual investors can participate and make stock transactions.

2.2.2.1 The role of the underlying stock market

a Capital mobilization channel for the economy

The amount of money paid by investors for securities of issuers will be put intoproduction and business activities by enterprises, providing services, and contributing toincreasing the supply of goods and products for society Through the stock market, thegovernment and local authorities also mobilize capital sources for the purpose of usingand investing in the development of economic infrastructure, serving the common needs

of society

b _ Providing an investment environment for the public

The stock market provides a healthy investment environment for the public with avariety of securities of enterprises in many different industries Along with that, the types

of securities on the market have many characteristics and levels of risk, investors canchoose according to their investment style as well as risk tolerance As a result, the marketalso improved national savings significantly

c Improve liquidity for securities