Oil prices and stock returns evidence from vietnamese petroleum and transportation industries

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY Tran Huu Nghi OIL PRICES AND STOCK RETURNS: EVIDENCE FROM VIETNAMESE PETROLEUM AND TRANSPORTATION INDUSTRIES MASTER’S THESIS HO CHI MINH CITY 2010 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY Tran Huu Nghi OIL PRICES AND STOCK RETURNS: EVIDENCE FROM VIETNAMESE PETROLEUM AND TRANSPORTATION INDUSTRIES Ology: Finance – Banking Ology code: 60.31.12 MASTER’S THESIS Advisor PhD Nguyen Thu Hien HO CHI MINH CITY 2010 Acknowledgements First of all, I would like to express my deepest gratitude and sincere thanks to my advisor, PhD Nguyen Thu Hien, for her valuable advice, suggestions, and comments throughout every step of my study Secondly, I would like to thank all my professors for giving me fundamental and academic knowledge during years of my study Especially, I would like to send my special thanks to Dr Cao Hao Thi, who gave me necessary statistical knowledge to finish this study Thirdly, my thanks would also go to my classmates, and my colleagues for their supports and encouragements Finally, I would like to thank my parents, and all members in my family those who are always by my side and encourage me during my study i Abstract The study aims to examine the impact of oil price changes on the stock returns in Vietnam market by analysing daily data during the period from January 2006 to December 2009 The international multi-factor model is taken as an approach in the paper in order to investigate the relationship between oil price changes and stock returns of Ho Chi Minh Stock Exchange, petroleum, and transportation industries on Ho Chi Minh Stock Exchange Evidence shows that there are significant links between oil price changes of the previous day and stock returns of these two industries and HoSE These results are useful for investors, managers, and policy makers ii TABLE OF CONTENTS Acknowledgements i Abstract .ii TABLE OF CONTENTS iii LIST OF FIGURES v LIST OF GRAPHS v LIST OF TABLES vi ABBREVIATIONS vii CHAPTER 1: INTRODUCTION 1.1 Rationale of the study 01 1.2 Research questions and objectives 03 1.3 Scope and limitation 03 1.4 Research methodology 03 1.5 Significance of the study 04 1.6 Structure of the study 04 CHAPTER 2: LITERATURE REVIEW 2.1 Theoretical background .06 2.1.1 Market efficiency 06 2.1.2 Capital Asset Pricing Model (CAPM) 08 2.1.3 Arbitrage Pricing Theory (APT) .10 2.1.4 Oil price changes and rationality of Stock market 12 2.2 Previous researches 14 CHAPTER 3: METHODOLOGY AND DATA 3.1 Research methodology 17 3.1.1 Research design 17 3.1.2 Quantitative research 18 iii 3.2 Data description 22 3.2.1 Stock returns 24 3.2.2 Oil price changes .27 3.2.3 Exchange rate returns 28 CHAPTER 4: DATA ANALYSIS 4.1 Desciptive statistics 29 4.2 Regression results 31 4.2.1 Correlations .31 4.2.2 Regression results with OILt-1 33 4.3 Summary of regression results 44 CHAPTER 5: CONCLUSIONS 5.1 Overview 46 5.2 Summary of findings 47 5.3 Limitations and further researches 50 References 52 Appendices Appendix 1: Vietnam petro prices 2006-2009 55 Appendix 2: Regulated amplitude of exchange rate 2006-2009 56 iv LIST OF FIGURES Figure 1.1: Structure of the study .01 Figure 3.1: Research design .17 Figure 3.2: Research hypotheses 19 Figure 4.1 Hypothesis H1 testing result 36 Figure 4.2 Hypotheses H2, H3, H7 and H8 testing results 41 LIST OF GRAPHS Graph 1.1: Oil prices and VNindex in 2008 01 Graph 3.1: Fluctuation of oil price 2006-2009 23 Graph 3.2: Fluctuation of VNindex 2006-2009 .23 Graph 4.1: Histograms and Q-Q plots of daily stock returns 30 Graph 4.2 Histogram and Q-Q plot of index residual 36 Graph 4.3: Histogram and Q-Q plot of petro residual .42 Graph 4.4 Histogram and Q-Q plot of trans residual .42 v LIST OF TABLES Table 3.1: Testing hypotheses for the significance 22 Table 3.2: List of stocks in the petroleum industry 26 Table 3.3: List of stocks in the transportation industry 26 Table 4.1: Descriptive statistics of stock returns, oil price changes, and exchange rate returns .29 Table 4.2: Correlations of Indext, Petrot, Transt with OILt and TWEXt 32 Table 4.3: Correlations of Indext, Petrot, Transt with OILt-1 .34 Table 4.4: Regression analysis of the relation between Indext and OILt-1 .35 Table 4.5 Hypothesis H1 testing result 36 Table 4.6 Regression analysis of the relation between Ln( ε Indext ) and E(Indext) 38 Table 4.7 Regression analysis of the relation between Petrot and OILt-1 38 Table 4.8 Regression analysis of the relation between Transt and OILt-1 39 Table 4.9 Hypotheses H2, H3, H7 and H8 testing results 40 Table 4.10 Correlation between OILt-1 and Index residual 41 Table 4.11 Corelation between OILt-1 and Index residual 43 Table 4.12 Regression analysis of the relation between Ln( ε Petrot ) and E(Petrot) 44 Table 4.13 Regression analysis of the relation between Ln( ε Transt ) and E(Transt) 45 Table 5.1 Changes in ROE .48 Table 5.2 Summary of the study hypotheses testing results 50 vi ABBREVIATIONS ADF Augmented Dickey – Fuller APT Arbitrage Pricing Theory CAPM Capital Asset Pricing Model GCC Gulf Cooperating Council HoSE Ho Chi Minh Stock Exchange OLS Ordinary Least Square ROE Return on Equity vii Page Chapter Introduction CHAPTER 1: INTRODUCTION This chapter introduces the rationale of the study, research questions and objectives The study scope, significance, and the structure of the study are also discussed in this chapter 1.1 RATIONALE OF THE STUDY Oil is a very essential energy for any country all over the world Changes in oil price have become one of the most important factors that contribute to current global economic activity Oil price hikes would make price in commodities increase, and in turn, hearten global inflation and slow down economic growth Moreover, oil is one of the operational cost factors The higher oil price increases, the higher production cost is For this reason, oil price hikes will cause expected earnings to decline, which bring a decrease in stock prices In other words, increasing oil price potentially affects stock market performance by altering financial performance or cash flows of companies As illustration of this, the oil price increased 52.67% between January 2008 and June 2008, and VNindex decreased 52.68% on the same period 160 700 600 500 120 400 300 200 100 140 100 80 60 40 20 Oil Pric e (U S$per barrel) 900 800 Ja n0 Fe bM 08 ar -0 Ap rM 08 ay -0 Ju n0 Ju l-0 Au gSe 08 p0 O ct -0 No vDe 08 c08 VNindex Graph 1.1: Oil prices and VNindex in 2008 VN index Oil Pric e Chapter Data Analysis Page 42 Residual assumptions tests are still (1) the residual is normally distributed, (2) observations in the residual are independent, and (3) the residual has the same variability (no presence of heteroskedasticity) Once again, the study uses the histograms and Q-Q plots in order to test the normal distribution of residuals Graph 4.3 and graph 4.4 show that the residuals of petroleum and transportation industries in equation (4.2) and (4.3) are normally distributed Graph 4.3: Histogram and Q-Q plot of petro residual Graph 4.4 Histogram and Q-Q plot of trans residual Page 43 Chapter Data Analysis The Durbin Watson statistics of models (4.2) and (4.3) are 1.74 and 1.38 respectively, which simply shows that the models meet the assumption of residuals’ independence The Park test is still employed to test the presence of heteroskedasticity in these two models Following that, the study will take the regression between Ln( ε Petrot ) and estimated value of petroleum stock returns, E(Petrot), and between Ln( ε Transt ) and estimated value of transportation stock returns, E(Transt): Ln( ε Petrot ) = a3 + a4E(Petrot) (4.5) Ln( ε Transt ) = a5 + a6E(Transt) (4.6) Testing the significance of coefficients a4 and a6 will give the answer to the presence of heteroskedasticity in the models If the null hypotheses a4 = and a6 = can be rejected, the residuals not have the same variability, or the models violate the assumption of residuals’ the same variability Table 4.11 Regression analysis of the relation between Ln( ε Petrot ) and E(Petrot) This table contains estimates of regression (4.5): Ln( ε Petrot ) = a3 + a4E(Petrot) Variable Coefficient Std Error t-Statistic Prob C E(Petrot) -9.533069 4.841986 0.071240 4.445012 -133.8159 1.089308 0.0000 0.2763 R-squared Adjusted R-squared S.E of regression Durbin-Watson stat 0.001198 0.000188 2.237574 1.724236 Mean dependent var S.D dependent var F-statistic Prob(F-statistic) -9.527851 2.237785 1.186591 0.276284 Testing results are reported in table 4.11 and table 4.12 In both cases, with the significance of 5%, the null hypotheses a4 = and a6 = cannot be rejected since their p-values are larger than 0.05 (p-values are 0.28, and 0.22 respectively) Page 44 Chapter Data Analysis Hence, the models not violate the assumption that the residuals have the same variability, or there is no presence of heteroskedasticity in the models Table 4.12 Regression analysis of the relation between Ln( ε Transt ) and E(Transt) This table contains estimates of regression (4.6): Ln( ε Transt ) = a5 + a6E(Transt) Variable Coefficient Std Error t-Statistic Prob C E(Transt) -10.38901 4.718166 0.072720 3.837035 -142.8640 1.229639 0.0000 0.2191 R-squared Adjusted R-squared S.E of regression Durbin-Watson stat 0.001526 0.000517 2.288454 1.590129 Mean dependent var S.D dependent var F-statistic Prob(F-statistic) -10.38669 2.289046 1.512011 0.219125 4.3 SUMMARY OF REGRESSION RESULTS Overall, the models built up by the study cannot prove a significant relationship between stock returns of HoSE, and petroleum and transportation industries and either oil price changes or exchange rate returns However, the study finds out the lagged reaction of stock returns with changes in the world oil prices Evidences show that oil price changes of the previous day can explain changes in stock returns of HoSE and these two sectors, petroleum and transportation ones The R-squared values for these two industries are 0.47 (petroleum) and 0.72 (transportation), which indicates that the models can explain considerably well the relationship between stock returns of these sectors and the fluctuations in oil prices Necessary tests, such as multicolinearity test, regression assumptions tests (including tests in dependent variables and the error terms), and tests for the Page 45 Chapter Data Analysis statistical significance of each independent variable and the whole models, were conducted in order to confirm again the suitability of models which were employed by the study as well as the considerable impacts of oil price changes on the stock returns The regression results are summarised in table 4.13 Table 4.13 Summary of regression results Independent variables Coefficient Prob Coefficient OILt-1 Prob Coefficient εIndext Prob R-squared F-statistics Prob Constant HoSE returns 0.000630 0.3384 0.118221 0.0000 0.027368 27.82839 0.000000 Dependent variables Petroleum returns Transportation returns 0.001027 0.000421 0.0585 0.2594 0.077108 0.106651 0.0000 0.0000 0.764795 0.902752 0.0000 0.0000 0.468270 0.723051 435.0430 1289.719 0.000000 0.000000 Chapter Conclusions Page 46 CHAPTER 5: CONCLUSIONS This chapter briefly summarises the study objectives, its method to reach these objectives, and findings Some limitations of the study and directions for further researches are also indicated in this chapter 5.1 OVERVIEW The study aims to find out the relationship between oil price changes and stock returns in Vietnam Therefore, the objectives of the study are: ⋅ To examine the impact of oil price changes on Vietnam stock exchange market in general ⋅ To measure the impact of oil price changes on stock returns of the petroleum and transportation industries in particular In order to achieve these objectives, the literature review of related theories, and previous researches is conducted, which is an important theoretical background to develop the study models and hypotheses Basing on the literature review, the international multi-factor model is taken as the approach of the study Ordinary Least Squares regression is conducted on each model to find out the relations, and tests for the statistical significance of the models are made by using the software Eviews 5.0 The datasets are collected from January 1st, 2006 to December 31st, 2009 for the stock returns, oil price changes, and exchange rate returns Exchange rate returns are added as another dependent variable in analysing process since their potential impact on the stock returns when the study employs the oil price in US dollars Besides, the residual of the OLS regression of the market returns is also added to the models when the study analyses the industries’ stock returns in order to identify the effect of the market returns to each industry’s stock returns Chapter Conclusions Page 47 The data in high frequency, daily data, are used in the study There are totally 922 observations 5.2 SUMMARY OF FINDINGS The models in the study investigate the relationship between stock returns, oil price changes, and exchange rate returns The model investigates the relationship between Ho Chi Minh Stock Exchange returns and changes in daily oil prices and exchange rate returns The model and model estimate the relationship between the petroleum and transportation industries’ stock returns and oil price changes, exchange rate returns, and the market returns (HoSE returns) The estimated coefficients are positive and statistically significant at the 5% level in all three models, which informs that stock returns of HoSE, petroleum and transportation industries have positive and statistically significant relationship with changes in oil prices of the previous day The stock returns in Vietnam market not correlate with oil price changes on the same day because of the lagged reaction with the changes of oil prices The positive relationship between stock returns of HoSE and transportation industry and the oil price changes of the previous day is inconsistent with the study expectation It shows that Vietnam companies transfer changes in input cost to their goods and services prices When increases in oil prices make input cost go up, the price of products will be risen in order to achieve the profit goals and maintain the companies’ operations How the product prices increase, much or less, immediately or slowly, is different from companies to companies, and mostly depends on the predictability of the companies Chapter Conclusions Page 48 By contrast, when input cost goes down due to decreases of oil prices, the companies face two options: (1) keep the product prices the same, and (2) decrease the product prices respectively With the first option, the companies gain more profit but have to face the risk of losing customers and market to their competitors The second option can solve the problem of the first option, but decreasing in profit is unavoidable Therefore, basing on the business strategy of each stage, each company has its own decision In order to understand how transferring of changes in input cost to products price can affect the stock returns, a simple example is conducted Assuming that the equity of a company is 100, with input cost of 5, the company can make an income of 10 To make it simple and easy to follow, other elements excluding oil prices will be keep stable, and there is no tax Changes in ROE (Return on Equity) of the company when the oil price increase and decrease 10% are reported in table 5.1 Table 5.1 Changes in ROE Description Normal case 10% increase in oil price makes cost increase 10% Income increase 10% respectively 10% decrease in oil price makes cost decrease 10% Income decrease 10% respectively Cost Income Profit 5.0 10 Profit ROE margin 5.0 50% 5.0% 5.5 11 5.5 50% 5.5% 4.5 4.5 50% 4.5% ROE measures the rate of return on the equity of the common stock owners It measures a firm's efficiency at generating profits from every unit of equity ROE shows how well a company uses investment funds to generate earnings growth Therefore, the higher ROE is, the more attractive the stocks of that company are The simple example shows that though profit margins not change in the three Chapter Conclusions Page 49 scenarios, the ROEs are actually affected In other words, if a company transfers changes in input costs causing by oil price changes to the products price, ROE of that company will increase/decrease with the increase/decrease of the oil price Changes in ROE affect investors’ psychology, which makes the stock price, and consequently the stock return, change Beside supported hypotheses, the three hypotheses about the significant relationship between stock returns and exchange rate returns are not supported The reason may come from the exchange rate mechanism of Vietnam Commercial banks in Vietnam can decide the exchange rate but not over the regulated amplitude from the average exchange rate in the interbank market During the research period, from 2006 to 2009, this amplitude fluctuated from 0.25% to 5%, and is 3% at present (see Appendix 2) In other words, exchange rate listed in commercial banks sometimes does not reflect the real one of the market Therefore, the exchange rate returns used in the study may be bias, or may not be the real changes of the exchange rates This is the reason why the study cannot identify the relationship between Vietnam stock returns and exchange rate returns This result is in agreement with the paper by Basher and Sadorsky (2006) in establishing a conditional and unconditional relationship between stock returns and risks in emerging markets To sum up, the hypotheses testing results are reported in table 5.1 in order to have an overview of the study findings Chapter Conclusions Page 50 Table 5.2 Summary of the study hypotheses testing results Hypotheses H1 Descriptions VNindex returns are negatively related to No, oil price changes H2 Results but positive relation Petroleum stock returns are positively Yes related to oil price changes H3 Transportation stock returns are negatively No, related to oil price changes H4 but positive relation VNindex returns are negatively related to No exchange rate returns H5 Petroleum stock returns are positively No related to exchange rate returns H6 Transportation stock returns are negatively No related to exchange rate returns H7 Petroleum stock returns are positively Yes related to VNindex returns H8 Transportation stock returns are positively Yes related to VNindex returns 5.3 LIMITATIONS AND FURTHER RESEARCHES Like any other research, this study has several limitations The first one is the sample period The data are collected in four years from 2006 to 2009, which mainly bases on the availability of the data This sample includes 992 observations, enough to make analysis However, using a broader set of data will help to further understanding of the relationship between oil price changes and Vietnam stock market Chapter Conclusions Page 51 Second, due to time restriction, the study only focuses on the impact of oil price changes on the Ho Chi Minh Stock Exchange, and two industries, petroleum and transportation ones, on Ho Chi Minh Stock Exchange Even though Ho Chi Minh Stock Exchange can be a good representative for the Vietnam Stock market, the study on both Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange and other industries can give a better conclusion about the whole stock market in Vietnam An interesting area of future research should be done is to identify the impact of oil price changes on other industries of the economy Besides, it may also be of interest to expand the set of risk factors to include other macroeconomic risks to see if the inclusion of additional risk factors improves upon the fit of the conditional model relating risk and returns References Page 52 References:  Agusman, and Elis Deriantino, August 2008, “Oil pri 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Eugenne F.Brigham, and Michael C Ehrhardt, Financial Management Theory and Practice, Tenth Edition, 257-275  Gur Huberman, Zhenyu Wang, August 15, 2005, “Arbitrage Pricing Theory” References Page 53  Hoàng Trọng, Chu Nguyễn Mộng Ngọc, 2008, “Thống kê ứng dụng kinh tế - xã hội”, Nhà xuất thống kê (2008)  Mehmet Eryigit, 2009, “Effects of Oil price changes on the Sector Indices of Istanbul Stock Exchange”, International Research Journal of Finance and Economics issue 25, 209-216  Mohamed El Hedi Arouri, and Julien Fouquau, June 2009, “On the short- term influence of oil price changes on stock markets in GCC countries: linear and nonlinear analyses”, Economics Bulletin AccessEcon Vol 29 (2), 795-804  Mohan Nandha, Shawkat Hammoudeh, 2006, “Systematic risk, and oil price and exchange rate sensitivities in Asia-Pacific stock markets”, Research in International Business and Finance 21 (2007), 326-341  Roger D.Huang, Ronald W.Masulis, and Hans R.Stoll, 1996, “Energy shocks and financial markets”, The Journal of Futures Markets 16, 1-27  Sadorsky, P., 2001, “Risk factors in stock returns of Canadian oil and gas companies”, Energy Economics 23(1), 17-28  Shawkat Hammoudeh, and Kyongwook Choi, 2005, “Behavior of GCC stock markets and impacts of US oil and financial markets”, Research in International Business and Finance 20 (2006), 22-44  Stephen G.Hall, and Amangeldi Kenjegaliev, 2009, “Effect of oil price changes on the price of Russian and Chinese oil shares”, University of Leicester Discussion Paper in Economics, Working Paper No 09/14 (September 2009) References Page 54  Syed A.Basher, and Perry Sadorsky, 2006, “Oil price risk and emerging stock markets”, Global Finance Journal 17 (2006), 224-251 Website:  http://tonto.eia.doe.gov  http://www.eurojournals.com  http://www.fpts.com.vn  http://www.petrolimex.com.vn  http://www.sciencedirect.com  http://www.ssrn.com  http://www.vsd.vn  http://www.wikipedia.com Appendix 1: Vietnam petro prices 2006-2009 Page 55 Appendix 1: Vietnam petro prices 2006-2009 No Period 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Nov 22nd, 2005 – Apr 27th, 2006 Apr 27th, 2006 – Aug 09th, 2006 Aug 09th, 2006 – Sep 12th, 2006 Sep 12th, 2006 – Oct 06th, 2006 Oct 06th, 2006 – Jan 13th, 2007 Jan 13th, 2007 – Mar 06th, 2007 Mar 06th, 2007 – May 07th, 2007 May 07th, 2007 – Aug 16th, 2007 Aug 16th, 2007 – Nov 22nd, 2007 Nov 22nd, 2007 – Feb 25th, 2008 Feb 25th, 2008 – Jul 21st, 2008 Jul 21st, 2008 – Aug 14th, 2008 Aug 14th, 2008 – Aug 27th, 2008 Aug 27th, 2008 – Oct 07th, 2008 Oct 07th, 2008 – Oct 17th, 2008 Oct 17th, 2008 – Oct 18th, 2008 Oct 17th, 2008 – Oct 31st, 2008 Oct 31st, 2008 – Nov 08th, 2008 Nov 08th, 2008 – Nov 15th, 2008 Nov 15th, 2008 – Dec 01st, 2008 Dec 01st, 2008 – Dec 10th, 2008 Dec 10th, 2008 – Apr 02nd, 2009 Apr 02nd, 2009 – Apr 11th, 2009 Apr 11th, 2009 – May 08th, 2009 May 08th, 2009 – Jun 10th, 2009 Jun 10th, 2009 – Jul 01st, 2009 Jul 01st, 2009 – Aug 09th, 2009 Aug 09th, 2009 – Aug 30th, 2009 Aug 30th, 2009 – Oct 01st, 2009 Oct 01st, 2009 – Oct 24th, 2009 Oct 24th, 2009 – Nov 20th, 2009 Nov 20th, 2009 – Dec 15th, 2009 Dec 15th, 2009 – Dec 31st, 2009 A92 Petro price (Vietnam Dong/litre) 9,500 11,000 12,000 11,000 10,500 10,100 11,000 11,800 11,300 13,000 14,500 19,000 18,000 17,000 16,500 16,000 15,500 15,000 14,000 13,000 12,000 11,000 11,500 12,000 12,500 13,500 14,200 14,700 15,700 15,200 15,500 16,300 15,950 (Source: http://www.petrolimex.com.vn) Appendix 2: Regulated amplitude of exchange rate 2006-2009 Page 56 Appendix 2: Regulated amplitude of exchange rate 2006-2009 No Regulations Effective Date Amplitude July 1st, 2002 0.25% 01 Decision 679/2002/QĐ-NHNN 02 Decision 2554/QĐ-NHNN December 31st, 2006 0.50% 03 Decision 3039/QĐ-NHNN December 24th, 2007 0.75% 04 Decision 504/QĐ-NHNN March 7th, 2008 1.00% 05 Decision 1436/QĐ-NHNN June 26th, 2008 2.00% 06 Decision 2635/QĐ-NHNN November 6th, 2008 3.00% 07 Decision 662/QĐ-NHNN March 23rd, 2009 5.00% 08 Decision 2666/QĐ-NHNN November 25th, 2009 3.00% ...MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY Tran Huu Nghi OIL PRICES AND STOCK RETURNS: EVIDENCE FROM VIETNAMESE PETROLEUM AND TRANSPORTATION INDUSTRIES Ology: Finance... stock returns are calculated from closing prices of HoSE index, and stocks in petroleum and transportation industries Oil prices are the West Texas Intermediate Spot prices FOB of crude oil, which... a relationship between oil price and stock returns in Vietnam? • How does oil price affect to the Vietnam stock market in general, and to stock returns of petroleum and transportation industry