Research objectives: The impact of monetary policy on Vietnam stock market with regard to two aspects which are stock price and market liquidity.
MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY HO CHI MINH CITY DANG THI QUYNH ANH THE IMPACT OF MONETARY POLICY ON VIETNAMESE STOCK MARKET SUMMARY OF PHD THESIS MAJOR: FINANCE – BANKING CODE: 62.34.02.01 SUPERVISORS: ASS PROF DO LINH HIEP ASS PROF HA THI THIEU DAO Hochiminh City, 2018 1 Summary The stock market is a channel for mobilizing medium to long-term capital for the economy and is an investment channel which attracts the attention of the authorities, domestic and foreign investors Vietnam’s stock market has experienced over 16 years of establishment and development There were periods when the stock market grew too fast (especially in the period of 2006 - 2007), only totake the plunge in 2008-2009, which affected investors, securities companies and financial services providers The volatility of the stock market is subject to many factors among which are the macroeconomic factors, especially the central bank's monetary policy which plays an important role This dissertation was conducted to study the impact of monetary policy on the stock market during the period 2002 – 2016 using monthly time data collected from reliable sources Specifically: (i) study the impact of monetary policy (money supply, interbank interest rate) on the stock market in Vietnam (measured by VN-Index); (ii) study the impact of monetary policy (money supply, interbank interest rate) on Vietnam’s stock market liquidity (measured by characteristics) The regression models used are the SVAR and VAR models based on the Eviews 8.0 software, and the research results show that: (1) During the study period, the relaxing (tightening) of monetary policy by the SBV had the effect of increasing (decreasing) stock price immediately after months and lasting up to months later The variance decomposition shows that from January 2002 to December 2007, the impact of monetary policy on the stock market was not as strong as in the period from January 2008 to December 2016 (2) In addition, when SBV relaxes (tighten) the monetary policy by increasing (decreasing) the money supply, the liquidity of Vietnam stock market increases (decreases) The results of variance decomposition show that the money supply and interbank rates explain 8% - 10% of volatility of liquidity (or illiquidity) after a period of 9-12 months The remaining variables explain 6% - 9% volatility of liquidity variables in shorter windows (only months) (3) Indicating the impact of monetary policy on stock prices: when SBV increases the total means of payment (or money supply), this reduces the mobilizing interest rate of commercial banks, making investment in securities more appealing and shooting up the demand for shares In addition, falling interest rates also reduces the cost of borrowing from businesses, thereby stimulating businesses to increase investment, expanding production and profit is expected to increase and so stock prices 2 CHAPTER 1:INTRODUCTION 1.1 Research topic Nowadays, most individuals are directly or indirectly involved in the stock market In deciding which stocks to buy or sell, investors need to estimate the expected rate of returns as well as the risk in investing in each stock Meanwhile, companies that raise capital from the sale of shares to the public need to decide what price to sell at and how many stocks to sell Policymakers need to understand the mechanism of the impact of changes in monetary policy management to the stock market, thereby accommodating the objective of stabilizing the stock market with their existing objectives Research by Bernanke and Gertler (2000) suggests that policymakers should maintain the stability of commodity prices in the economy to avoid impacting stock prices significantly In order to find out which major factors have impact on the Vietnam’s stock market, there are a number of research topics carried out in different periods with different approaches The studies of Nguyen Son (2003), Dang Van Hai (2007), Hoang Xuan Que (2007), Tran Trong Triet (2008), Nguyen Thi Mui (2009), Le Hoang Nga (2009), Tran Hoang Ngan, 2009), VAFI (2012), Doan Ngoc Hoan (2013) have shown that short-term macro factors have certain impacts on the stock market In addition, longerterm quantitative studies also show that macro variables such as inflation, exchange rates, money supply, interest rates and industrial output have important impacton stock prices, rate of return or liquidity of markets (Tran Thi Xuan Anh and Ngo Thi Hang (2012), Phan Dinh Nguyen and Ha Minh Phuoc (2012), Phan Thi Bich Nguyet and Pham Duong Phuong Thao (2013), Nguyen Huu Huy Nhat (2013), Than Thi Thu Thuy and Vo Thi Thuy Duong (2014), Tran Thi Hai Ly (2015), Le Dat Chi (2015) ) At present, the Vietnam’s stock market has developed vigorously with remarkable growth and is considered one of the top five markets in the world as stock prices have returned to the peak achieved in 2007 However, there is no research on whether such development is stable and affected by macroeconomic factors, especially from the management of monetary policy of the State Bank of Vietnam has impact on the market development The thesis entitled "The Impact of Monetary Policy on the 3 Stock Market" was conducted to clarify this issue, helping policymakers and investors to unfold the impact of monetary policy on the price and liquidity of the stock market, thus devising appropriate operational policies and investment strategies 1.2 Overview of the literature (domestic and international studies) Research on the impact of monetary policy on the stock market has been carried out since the 1970s (Rozeff, 1974; Pesando, 1974; Auerbach, 1976) The studies on the impact of monetary policy on the stock market across countries in the world have been conducted with different approaches The first approach is to study the impact of monetary policy on the stock market, which considers the role of the stock market as a channel to convey the influence of the monetary policy on the economy Mishkin (2001), Cosimano et al (1999), Ehrmann and Fratzscher (2004), Berument and Kutan (2007) are typical studies of this type The second approach is to study the reaction of stock prices to the announcement of the change in operating interest rates or money supply Under this approach, researchers often use event study methodology with high frequency (day or week) data to gauge the immediate impact of monetary policy announcementson the stock market price A third approach is to use a regression model using monthly or quarterly data to assess the short- and long-term effects of monetary policy – related variables on stock prices (or returns ) and liquidity of the stock market The results of previous studies in the 1990s (Pesando, 1974; Rozeff, 1974; Rogalski and Vinso, 1977; Darrat, 1990) show that changes in monetary policy (money supply or interest rates) not Granger cause the changes in share price (or return) This approach is also widely adopted in the context of emerging markets such as Tang et al (2013) in China, Abaenewe and Ndugbu (2012) in Nigeria, Seong (2013) in Singapore, Yoshino et al (2014) in South East Asian countries Most of the findings show that the shocks to monetary policy affect the stock price or the rate of return in the stock market: The tightening effect of monetary policy on stock prices is negative and vice versa Domestic studies have been conducted mainly using the third approach, such as Nguyen Huu Tuan (2011), Phan Dinh Nguyen and Tang Trang Chau (2013), Nguyen Minh Kieu and Nguyen Van Diep (2013), Phan Thi Bich Nguyet and Pham Duong 4 Phuong (2013), Bui Kim Yen and Nguyen Thai Son (2014), Duong Ngoc Mai Phuong and Vu Thi Phuong Anh (2015), Than Thi Thu Thuy (2015) However, in general these studies only assess the impact of macro factors on the stock market without examining the impact of monetary policy on stock prices and liquidity of the market 1.3 Objectives and research questions a Research objectives + Determine the direction of the impact of monetary policy on share price and liquidity of Vietnam’s stock market + Determine the impact of monetary policy - related factors on stock prices and liquidity of the Vietnam’s stock market + Clarify the mechanism of impact of monetary policy to share price and liquidity of Vietnam’s stock market + Make recommendations for policymakers to support the development of the stock market and for investors to increase profits, reduce risks b Research questions + Does the monetary policy affect stock prices in Vietnam stock market? If so, what is the direction and magnitude of the impact of monetary policy factors on the stock market in Vietnam? + Does the monetary policy affect the liquidity of the Vietnamese stock market? If so, how are the trends and magnitude of the impact of monetary policy factors on market liquidity? + What is the impact of monetary policy on stock prices and liquidity of the stock market? + What are the recommendations for policymakers to support the development of the stock market? 1.4 Object and scope of the study Research objectives: The impact of monetary policy on Vietnam stock market with regard to two aspects which are stock price and market liquidity 5 Research scope: + Space: The stock market referred is the trading exchange of HOSE (HSX) + Time: study the impact of monetary policy on the Vietnam’s stock market from January 2002 to December 2016, with information collected from reliable sources such as SSC, HOSE, Hanoi Stock Exchange, SBV, IFS, ARIC and some websites such as Cafef, Stox Plus 1.5 Research methodology The dissertation uses quantitative research methods in combination with qualitative analysis to achieve research objectives To address question 1, the thesis uses the structural vector autoregressive (SVAR) model with structured shocks based on the studies of Lütkepohl (2005), Kim (1999), Kim and Roubini (2000), Ben Naceur et al (2007) and add exogenous variables to suit the reality of the Vietnamese stock market To address question 2, the thesis utilizes a vector autoregressive model (VAR) based on the research model of Chordia and ctg (2005), Lu-Andrews and Glascock (2010), Fernández-Amador and ctg (2013) Basing on the results of these two models and combining with the qualitative method, the dissertation strives to analyze the implementation of monetary policy by SBV in reality, the evolution of the development of the Vietnam’s stock market, thus indicating the mechanism of impact of monetary policy on the stock market and providing some policy recommendations to the authorities and investors 1.6 The scientific and practical contributions of the thesis a Scientific contribution In the Vietnam’s stock market, although there are many studies on the impact of macro variables on the stock market, there have been no studies on the single impact of monetary policy on stock prices and market liquidity This study was conducted over a long period of time, including the period of strong growth, recession and recovery In addition, the study also shows the impact of monetary policy on the development of 6 the Vietnamese stock market, in terms of the extent and direction of those effects The results of the study are based on empirical verification through the SVAR and VAR models, ensuring reliability so that they can be used for future research not only in updating theories but also comparing results of extant studies b Practical contribution Research shows that the increase (decrease) of money supply has the effect of increasing (decreasing) stock prices as well as liquidity of the stock market This helps the policymaker see the mechanism of impact of monetary policy to the stock market, thus developing policies suitable to the conditions of the economy as well as supporting the development of the stock market Investors can use research results as a reference for making investment decisions in accordance with each stage of the economy as well as the monetary policy administration of SBV 1.7 New findings from research results In the periods of expansion (tightening), the monetary policy has the effect of increasing (decreasing) stock prices in the stock market immediately after months and lasting up to months thereafter VNI reacted in the same direction to the increase in money supply and in the opposite direction to the rise of interbank rates VNI's reaction to the change in money supply is stronger than that in interbank rates The variance decomposition shows that from January 2002 to December 2007, the impact of monetary policy on the stock market was not as strong as in the period from January 2008 to December 2016 VNI has reacted quite strongly to the shock in consumer price index, particularly VNI started falling from the first month of the CPI shock and reached a new equilibrium level of 6% fall after periods In addition, the SBV’s loosening (tightening) monetary policy by increasing (decreasing) money supply tends to increase (decrease) the liquidity of the stock market The results of variance decomposition show that the money supply and interbank rates explain 8% - 10% volatility of liquidity (or liquidity) after a period of 9-12 months The remaining variables explain 6% - 9% of the volatility of liquidity variables in shorter windows (only months) 7 The research has shown the mechanism of impact of monetary policy to share price and liquidity of Vietnam stock market In particular, the increase in money supply by the SBV has reduced the market interest rates and reduced the cost of debt to businesses, thereby increasing profitability for listed companies At the same time, the reduction in interest rates also increases the demand for shares from investors, thus increasing the stock price and increasing the value of stocks traded on the stock market 1.8 Structureof the dissertation The dissertation comprises of chapters as follows: Chapter 1: Overview of research topic Chapter 2: Theories on the impact of monetary policy on the Stock Market Chapter 3: Modeling and Research Methods Chapter 4: Research Results and Discussion Chapter 5: Conclusions and policy recommendations 8 CHAPTER THEORIES ON THE IMPACT OF MONEY POLICY ON THE SECURITIES MARKET 2.1 Concepts related to the topic 2.1.1 Monetary policy Monetary policy (MP) is a process by which the central bank uses tools to regulate money supply, credit, and interest rates in the economy in an attempt to ensure the stability of monetary value, economic growth and employment (Mishkin, 2013) The tools under the discretion of MP are compulsory reserves, open market operations, discount policy, interest rates, exchange rates 2.1.2 Securities market The stock market is the place where exchanging, trading and transfering of medium to long-term securities are held, thereby changing the owners of securities Basically stock market is the operating process of capital This is the place to buy and sell the property rights related to capital and is a form of advanced development of goods production A stock price index is an indicator that reflects the change of stock prices at a time compared to the original price Stock price indexes are the most important information in the market and are often used by investors in stock investment analysis (Nguyen Dang Nam, 2006) 2.2 Impact of monetary policy on the stock market 2.2.1 Impact of monetary policy on stock prices According to Brunner's monetary theory of monetary volume (1961), Friedman and Schwartz (1975) monetary policy can influence stock prices by choosing the investment portfolios: MS ↑ → due to the effect of wealth effect → stock demand ↑ → stock price ↑ 9 Basing on Gordon's dividend discount model (1962), Patelis (1997) suggested that MP could influence stock prices in two ways The first way is to directly influence the stock price by affecting the interest rate expected by investors The second way is to indirectly influence the stock price by affecting the expected return of the company in the future, thereby affecting the expected dividend MS ↑ → r ↓ → SP ↑ (direct impact) MS ↑ → r ↓ → Y ↑, CF ↑ → SP ↑ (indirect effect) According to the efficient market theory (Fama (1970)):in a medium-efficient market shows that changes in the expectation of money supply are included in the published information, thus having no value in stock price forecasts MS ↑ out of expectation → inflation ↑ expected → r ↑ → Y ↓, CF ↓ → SP ↓ MS ↑ out of expectation → future tightening monetary policy expected → r ↑ → Y ↓, CF ↓ → SP ↓ MS ↑ out of expectation → policy uncertainty ↑ → risk increase → SP ↓ 2.2.2 Impact of monetary policy on stock market liquidity Concept of stock market liquidity: The stock market is considered to have good liquidity if the following conditions are met: (i) there is always an ask price and offer price so that investors can trade immediately; (ii) the difference between the ask price and the bid price is marginal; (iii) investors can buy large amounts of securities immediately with low transaction costs According to Baker (1996), market liquidity features include: instantness, breadth, depth and elasticity Impact of monetary policy on stock market liquidity: According to O'hara's (1995) micro-market structure theory, the liquidity of each stock depends on the characteristics of the stock and the trading mechanism in the market Monetary policy can influence the liquidity of stocks in the market througheasing (or tightening) monetary policy whichwill reduce (or aggravate) margin borrowing, thereby increasing (decreasing) capital liquidity of market participants 2.3 Related studies 2.3.1 Overseas studies 21 investors (6,642 accounts in 2016 ) The number of foreign investor accounts was 17,789, of which individual investors accounted for more than 87% (15,525 accounts) Figure 4.2 Growth of trading accounts on Vietnam’s stock market 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Compiled from the Annual Report of the Securities Depository Center However, the structure of investors in the stock market in Vietnam shows sign of deficiency, with the proportion of individual investors occupying the majority, and the proportion of institutional investors being low The asset value of domestic and foreign institutional investors at the end of 2016 is about 15% of GDP, lower than that in some other countries in the region, for example in Malaysia and Thailand around 66 % and 22% of GDP, respectively That individual investors occupy a large proportion of the number of investors and value of transactions leads to market instability Stock market’s volatility is quick to come, strong and abnormal due to the psychology of individual investors with low savings, herding behavior and short investment horizon These investors are vulnerable, making it difficult for firms to mobilize capital and to equitize state-owned enterprises, thus making it impossible for the stock market to develop sustainably 4.2 Research results on impact of monetary policy on share price in Vietnam stock market 4.2.1 Descriptive statistics of the variables in the model Table 4.4 Statistics describing the variables in the SVAR model Character Mean Median Max FFR 1,371 0,380 5,260 OIL 84,266 79,577 168,106 IPI 12,243 10,104 67,718 CPI 8,016 6,876 28,320 M2 IR 25,116 6,729 23,248 6,511 50,501 18,651 VNI 459,7 466,9 1.110,9 22 Min 0,070 23,431 -10,140 Standard 1,710 40,323 8,686 dev Skewness 1,249 0,227 2,093 Kurtosis 3,166 1,669 11,845 No of obs 180 180 180 Source: extracted from Eviews 8.0 software -0,002 10,393 0,541 135,2 6,204 8,368 3,512 213,1 1,480 4,860 180 0,752 3,259 180 1,080 4,132 180 0,831 3,939 180 Since data is collected on a monthly basis, seasonal factors may matter Therefore IPI, CPI, and M2 variables used in the model have been seasonally adjusted by the Census X12 tool Since oil prices and VNI are not standardized, these data series are logarithmically computed to meet the requirements of the SVAR model and the least squares estimation method 4.2.2 Stationarity and differencing of the data The results in Table 4.5 for all series are stationary at base level, except for the US interest rate, money supply and federal funds rates In this study, data should be stationary to be used in the SVAR model Consequently, non-stationary data are first differenced to transform them to be stationary to ensure that the estimates are stable and reliable Table 4.5 ADF and PP tests for variables in the SVAR model Level Variables VNI IR IPI CPI M2 OIL FFR t stat ( ADF) -8,1342* -2,5923*** -3,4358** -2,6177*** -1,2655 -9,4699* -3,0328** t stat ( ADF) -7,8863* -2,0750 -10,9083* -2,6421*** -2,6524 -9,3877* -1,2423 First differenced t stat ( t stat ( ADF) PP) -11,7516* -11,9321* -7,6133* -10,7506* -5,8095* -5,6700* Result I(0) I(1) I(0) I(0) I(1) I(0) I(1) Note: *,**,*** denote significant at 1%, 5%, 10% respectively Source: Extracted from Eviews 8.0 4.2.3 Optimal lag order selection and SVAR model tests + Optimal lag order Table 4.6 shows that FPE, AIC, and HQ criteria urge the choice of lag order Optimal lag order criteria typically rely on AIC and FPE standards; therefore, the optimum lag order for the selected model is 23 Table 4.6 Determining the optimal lag order of the SVAR model Lag 10 LogL -1297,437 -830,873 -725,421 -683,995 -633,977 -598,528 -552,702 -517,693 -480,859 -439,170 -402,100 LR NA 888,954 192,185 72,066 82,869 55,795 68,331* 49,302 48,821 51,803 42,992 FPE 0,0119 0,00835 0,00434* 0,00483 0,00484 0,00581 0,00624 0,00772 0,00951 0,00113 0,00145 AIC SC HQ 15,437 15,566 15,489 10,495 11,532* 10,916 9,827* 11,772 10,616* 9,917 12,769 11,074 9,905 13,664 11,430 10,065 14,732 11,959 10,102 15,677 12,365 10,268 16,750 12,899 10,412 17,802 13,411 10,499 18,796 13,866 10,640 19,844 14,375 Source: Extracted from Eviews 8.0 + SVAR model tests From the results of the general stability test of the model, the inverse of the polynomial of the characteristic AR shows that all solutions of the polynomial are in the unit circle, indicating that the VAR model is estimated to be (Appendix A - Figure A.1) The results of the correlation analysis of the residuals show that there is no correlation between the residuals in the model (Annex A - Table A.1) Thus, the SVAR model is estimated to be reliable 4.2.4 Results of the SVAR model study + The reaction of stock prices to monetary policy shocks, prices and output Figure 4.3 shows the reaction of VNI to the monetary policy shocks represented by the interbank rates and M2 money supply The increase in money supply began to impact the stock market price in the second month with an increase of 1.4% and reached the highest level of 3.5% after months (Figure 4.4a) However, this upward trend of VNI was not sustained but VNI fell back, returning to its original equilibrium after 12 months The interbank rates started to affect the VNI after a quarter with little impact When a shock increased to a standard deviation of interbank rates, the VNI slightly rose 1.6%, but fell immediately afterwards and reached a new equilibrium of 2.0% after months (Figure 4.4b) This can be explained by the fact that when the interbank interest rate increases, the market interest rate (especially the lending rate of commercial banks) starts to increase and then pressures to increase the cost of capital 24 of businesses This reduces the expectations of investors about the profitability of the business in the future Figure 4.3 The cumulative reaction of VNI due to the shock of the variables in the model (a) Due to money supply shock (b) Due to interbank rate shock 20 20 15 15 10 10 5 0 -5 -5 -10 -10 -15 -15 10 12 14 16 18 20 22 (c) Due to output shock 24 10 12 14 16 18 20 22 24 (d) Due to commodity price shock 20 20 15 15 10 10 5 0 -5 -5 -10 -10 -15 -15 10 12 14 16 18 20 22 24 10 12 14 16 18 20 22 24 Source: Extracted from Eviews 8.0 In addition, Figure 4.4c shows that stock prices not react immediately when there is an output shock and only starts to rise after months, reaching a new equilibrium level of 4.5% after 12 months According to the dividend discount model and the monetary quantity theory, the increase in output shows that the business performance is getting better, resulting in an increase in profitability and expected cash flow and ultimately stock prices In contrast to output shock, VNI reacted quite strongly to inflation shock The VNI started falling in the first month when the consumer price index shock occurred and reached a new equilibrium level of 6% after three quarters (Figure 4.4d) This result shows that investors in the Vietnam’s stock market react strongly to the CPI shock Concern about the inflation boom is always reigning and greatly affects the psychology of investors From the above analysis, it is clear that monetary policy has a stronger impact on the stock market in Vietnam Changes in the SBV's monetary policy through changes in 25 interbank interest rates have the opposite effect and money supply has the same impact on securities prices with 3-6 months lag In particular, VNI is quite sensitive to changes in commodity prices When there was a sudden increase in CPI, the VNI also reacted immediately and continued falling sharply This result is the basis for policy recommendations to the SBV in conducting monetary policy + The response of output and commodity prices to monetary policy shocks Figure 4.4 shows that CPI strongly responds to monetary policy shocks The tightening of monetary policy (the increase in interbank rates) did not reduce inflation as expected but, on the contrary, increased inflation (Figure 4.5a) The explanation for this phenomenon is that the increase in the rediscount interest rateincreases the interest rates of banks, lifting the cost of borrowing by enterprises in the economy and the production costs and consumer prices (Schabert, 2001) Figure 4.4 Cumulative effects of price and output caused by money supply and interest rates (a) Response of CPI to IR shock (b) Response of CPI to M2 shock 30 20 25 20 10 15 10 -10 -5 -20 -10 10 12 14 16 18 20 22 24 (c) Response of IPI to IR shock 15 10 12 14 16 18 20 22 24 (d) Response of IPI to M2 shock 15 10 10 5 0 -5 -5 -10 -10 -15 -15 10 12 14 16 18 20 22 24 10 12 14 16 18 20 22 24 Source: Extracted from Eviews The expansion of the money supply did not immediately increase inflation but on the contrary, the CPI decreased slightly when there was a sudden increase in money supply and only started to increase sharply after 12 months and reached a 16% increase in the next 12 months (Figure 4.4 b) Contrary to the strong reaction of commodity prices to the shocks in monetary policy, yields were affected by interbank rates to lighter extents Specifically, output fell 1.1% from the third month and reached 26 the highest level of 4.2% after 12 months when there was a shock of increasing the interbank rates (Figure 4.4c) Meanwhile, output has hardly been subject to significant impact from the shock of money supply Monetary expansion only increased output by approximately 1% after 12 months (Figure 4.4d) + Variance decomposition In order to clarify the role of monetary policy in changes of stock prices in Vietnam’s stock market, the variance decomposition was carried out in two phases: from January 2002 to December 2007 and from January 2008 to December 12, - Period from January 2002 to December 2007 From the results of the variance decomposition, Table 4.7 shows that in the period of 2002 - 2007 stock prices on the stock market reacted immediately to the shocks of all variables in the model right in the first period Exogenous variables account for more than 17% of the volatility of the VNI, while the SBV's CFS variables represent only about 10.5% of the volatility of the VNI In addition, VNI was affected by inflation and output with little impact, approximately 5% Table 4.7 Variance decomposition in the period from January 2002 to December 2007 Period 12 24 FFR 0,070 0,728 4,741 4,936 5,171 7,250 Variance decomposition of VNI OIL IPI CPI M2 IR VNI 3,572 2,802 1,387 0,135 0,177 91,857 8,293 1,578 1,651 1,130 2,254 84,366 9,598 1,655 1,953 2,656 3,075 76,322 10,581 1,886 2,090 2,808 6,686 71,013 10,485 2,058 2,430 3,361 6,709 69,786 10,261 2,439 2,385 3,571 6,701 67,393 Source: Extracted from Eviews The result is explained by the fact that this is the phase when market had just been operating and the number of shares listed and traded is very low The market capitalization in the first five years was approximately 1% of GDP, VNI only fluctuates in a narrow range, from 200 to 300 points, so it is sensible that the impact of the monetary policy of the SBV to market was not strong - The period from December 2007 to December 2016 In order to reduce the uncertainty regarding the fact that the stock price rose sharply in early 2007, SBV issued Directive 03/2007 dated 28 May 2007 and then Decision 03 / 27 NHNN dated 01/02/2008 In early 2008, the SBV continued to implement a series of monetary tightening measures such as requiring commercial banks to buy VND20,300 billion of compulsory bills, increase the prime rate, rediscount rate and refinancing rate in an attempt to curb inflation At the same time, SBV issued Decision No 03/2008 / QD-NHNN which not only impacted investors' sentiment but also directly affected cash flow into the stock market as well as investment cost Therefore, with the months’ lag VNI had fallen very strongly, reaching the bottom in 02/2009 at 261 points Table 4.8 Variance decomposition in December 2007 to December 2016 Period 12 24 FFR 3,150 2,744 3,254 4,115 4,111 4,153 Variance decomposition of VNI OIL IPI CPI M2 IR VNI 2,937 3,712 2,435 0,273 4,735 82,757 4,558 7,369 7,453 8,823 8,439 60,615 8,751 5,895 6,031 7,217 16,577 52,275 11,025 5,822 6,706 6,819 16,227 49,286 10,972 6,085 6,841 7,126 16,060 48,805 10,892 6,038 6,916 7,966 15,921 48,114 Source: Extracted from Eviews Table 4.8 shows that the monetary policy variables, especially the interbank rates, had a strong influence on the VNI in the first trading session with more than 4% and explained 16.5% volatility of the VNI only after seasons Money supply also accounted for 8.8% of the VNI's volatility after only three trading sessions The results show that at this stage, stock prices have had a clear reaction to changes in monetary policy 4.3 Research results on the impact of monetary policy on liquidity of Vietnam stock market 4.3.1 Overview of securities market liquidity in Vietnam From Figure 4.5, liquidity ratios (traded volume, liquidity ratio and stock turnover ratio)increased gradually from 2009 to 2010 Total traded value increased sharply from April 2009 to 17.631 trillion dong and reached the highest level in the whole period of 86.3 trillion dong in October 2009 Liquidity tends to increase, especially from 2012 to 2016, showing that the liquidity of Vietnam’s stock market has been improved in width and depth 28 Figure 4.5 Liquidity in the stock market of Vietnam Tỷ đồng TV 100,000 Zeros % 80,000 60,000 40,000 20,000 2002M1 2003M1 2004M1 2005M1 2006M1 2007M1 2008M1 2009M1 2010M1 2011M1 2012M1 2013M1 2014M1 2015M1 2016M1 LR 1,000 800 600 400 200 2002M1 2002M11 2003M9 2004M7 2005M5 2006M3 2007M1 2007M11 2008M9 2009M7 2010M5 2011M3 2012M1 2012M11 2013M9 2014M7 2015M5 2016M3 25 20 15 10 MLI 0.0040 0.0030 0.0020 Turnover 15 0.0000 2002… 2003… 2004… 2005… 2006… 2007… 2008… 2009… 2010… 2011… 2012… 2013… 2014… 2015… 2016… 2002M1 2003M1 2004M1 2005M1 2006M1 2007M1 2008M1 2009M1 2010M1 2011M1 2012M1 2013M1 2014M1 2015M1 2016M1 0.0010 Ailliq 20 15 10 10 5 2002M2 2002M12 2003M10 2004M8 2005M6 2006M4 2007M2 2007M12 2008M10 2009M8 2010M6 2011M4 2012M2 2012M12 2013M10 2014M8 2015M6 2016M4 2002M1 2002M12 2003M11 2004M10 2005M9 2006M8 2007M7 2008M6 2009M5 2010M4 2011M3 2012M2 2013M1 2013M12 2014M11 2015M10 2016M9 Source: author’s calculation 4.3.2 Descriptive statistics of the variables in the VAR model Table 4.1 Descriptive statistics of the variables in the VAR model Variable Mean Median Max Min St dev Skewness Kurtosis No obs IP_SA 12,23 10,79 39,74 0,11 7,55 1,47 5,31 180 CPI_SA 8,03 6,80 29,62 0,00 6,28 1,57 5,27 180 M2_SA 25,12 23,63 51,18 10,37 8,38 0,77 3,35 180 IR 6,73 6,51 18,65 0,54 3,51 1,08 4,13 180 SR 0,94 -0,11 41,55 -26,11 9,84 0,81 5,40 180 ZEROS 4,49 4,45 22,22 0,00 5,38 1,34 4,42 180 TURNOVER 3,21 2,74 13,37 0,11 2,03 1,74 7,56 180 TV 1.90E+13 1.48E+13 8.28E+13 2.18E+10 1.89E+13 0,85 2,85 180 MLI 3.93E+05 5.11E+04 9.40E+06 1.09E+03 8.80E+05 6,58 63,30 180 LR 1.96E+11 1.29E+11 9.09E+11 1.06E+09 2.23E+11 1,14 3,33 180 2,18 7,43 180 AILLIQ 2,42 0,98 16,40 0,11 3,35 Source: Extract from Eviews 8.0 software 29 Table 4.9 shows that the stock returns of the stock market has a minimum value of 26.11% and a maximum of 41.55% during the study period The variables reflecting the liquidity of the stock market include Turnover, TV and LR, and illiquidity variables including Zeros, MLI and Ailliq were calculated according to the formulas in Chapter All data were collected and have normal distribution creating 180 observations, suitable for use in the VAR model in time series data analysis 4.3.3 Stationarity, differencing of data and lag order of the models The results in Table 4.10 show that most variables are stationary at base level, except for money supply and interbank rates Thus, to ensure that the variables used are stationary, the first differencing of the variables that are not stationary at base level is performed The results show that the variables not stationary at base level are stationary after being first differenced with 1% significance level Table 4.10 Results of the ADF and PP tests of the variables in VAR model Variable Differenced Level ADF test Conclusion ADF test PP test Zeros -4,9717*** -11,3724*** I(0) LR -14,0837*** -23,9088*** I(0) LR -10,2733*** -11,7968*** I(0) TV -13,3127*** -25,5438*** I(0) MLI -6,1684*** -4,9772*** I(0) Turnover -13,7046*** -14,0208*** I(0) Ailliq -9,8265*** -9,8256*** I(0) SR -2,0751 -2,5923* IR -1,2655 -2,6524* M2 -3,4358** -10,9083*** I(0) IPI -2,6178* -2,6421* I(0) CPI -2,6178* -11,7516*** PP test -11,9321*** -7,6133*** -10,7506*** I(1) I(1) I(0) -2,6421* Note: *, **, *** denotes significance at 10%, 5% and 1% Source: Extracted from Eviews Table 4.11 shows that the optimal lag order of VAR models is chosen according to AIC and FPE standards, as follows: 30 Table 4.11 Optimal lag order selection for VAR Models Model VAR01 VAR02 VAR03 VAR04 VAR05 VAR06 Variables Optimal lag order to be selected 2 2 IPI, CPI, M2, IR, SR, ZEROS IPI, CPI, M2, IR, SR, LR IPI, CPI, M2, IR, SR, TV IPI, CPI, M2, IR, SR, MLI IPI, CPI, M2, IR, SR, TURNOVER IPI, CPI, M2, IR, SR, AILLIQ Source: Author Summary from Eviews 8.0 Software Tests for the VAR model include verifying the overall stability of the model by finding the inverse root of characteristic polynomial AR and tests of autocorrelation of residuals The results show that all solutions of polynomials are in the unit circle, indicating that the VAR models are stable At the same time, the results show that there is no correlation between the residuals in the model (Appendix C1 to C5) 4.3.4 The results of estimating the impact of monetary policy on each liquidity characteristic of Vietnam’s stock market Analyzing the impulse response function, we see the impact of monetary policy factors on liquidity characteristics including instantness, width, depth and elasticity of the market (Table 4.12) Table 4.12 Direction of impacts of monetary policy factors on liquidity of Vietnam stock’s market Liquidity character Instantness Width Depth Elasticity Proxy Output Inflation Stock return Interbank rate Money supply ZEROS + TV + + + LR + + + Turnover + + + MLI + + AILLIQ + 0 Note: sign (-): opposite effect, sign (+): same effect, (0): no impact Table 4.12 shows that liquidity measures of the market (TV, LR and Turnover) are proportional to M2 money supply and are almost unresponsive to changes in interbank rates Meanwhile, iliquidity variables (Zeros, MLI and AILLIQ) fluctuated in inverse direction to the increase in M2 money supply and show less response to the increase of 31 interbank rates This implies that when SBV loosens (tightens) monetary policy by increasing (decreasing) money supply, it will increase (reduce) liquidity of the stock market In addition, inflation has the opposite effect on all liquidity variables, indicating that the liquidity of the stock market will be reduced when there is an increase in consumer price index (inflation variable) Meanwhile, industrial output growth is positively correlated with the variables that represent the breadth and depth of the stock market The results of variance decomposition show that the money supply and interbank rates explain 8% - 10% of volatility of liquidity (or illiquidity) after a period of 9-12 months The remaining variables explain 6% - 9% of volatility of liquidity variables within shorter window (only months) This result shows that the monetary policy affects the liquidity of Vietnam’s stock market but the impact is not great It can be seen that the SBV has been continually changing its policies from loosening to tightening, and vice versa, especially in the period from 2007 to 2011, which caused significant impacts on stock price and liquidity of the stock market As the stock market's liquidity decreases, the mobilization of capital of listed companies will become more challenging Therefore, it is difficult for the stock market to play its role as a medium and long term capital mobilization channel for the economy In addition, the results of the study show that when there is a shock to inflation, the liquidity measures have decreased and the measure of liquidity has increased Consequently, continuing to maintain a stable long-term inflation rate of the SBV is essential not only to support the growth of the economy, but also to promote liquidity in the stock market Conclusion of Chapter In this chapter, the dissertation presents the implementation of monetary policy by the State Bank of Vietnam, the evolution of the stock market and discussion of the research results 32 CHAPTER 5: CONCLUSION AND POLICY RECOMMENDATIONS 5.1 Conclusions from the research results Domestic and international studies have shown that the stock market was significantly affected by macroeconomic fluctuations, especially from central bank's monetary policy Based on the study of impact of monetary policy on the stock market of Vietnam, the thesis has clarified the following contents: 5.1.1 Impact of monetary policy on share price in Vietnam’s stock market The results of estimating the SVAR model with variables including IPI, CPI, M2, IR, VNI, OIL and FFR show that during the study period, the expansion (tightening) of the monetary policy has increased (decreased) share price in the stock market immediately after months and lasts up to months later VNI reacted in the same way to the increase in money supply and in the opposite direction to the rise of interbank rates However, the reaction of VNI to the change of money supply is stronger than that of interbank rates The variance decomposition shows that from January 2002 to December 2007, the impact of monetary policy on the stock market was not as strong as in the period from January 2008 to December 2016 The results from the model show that VNI is sensitive to changes in commodity prices When there was a sudden increase in CPI, VNI also dragged down after months and continued to decline sharply This is empirical evidence as a reference for policymakers: maintaining a stable inflation rate in the economy does not only help stabilize the macro economy, increase employment but also promote stable development of the stock market 5.1.2 Impact of monetary policy on liquidity of Vietnam’s stock market To verify whether the monetary policy affects the liquidity of the Vietnamese stock market, and the extent and impact of the factors in monetary policy on the market on liquidity if any, the thesis used the VAR model with three groups of variables including: stock market liquidity, monetary policy variables and control variables Research shows that when the State Bank loosens (tightens) monetary policy by increasing (decreasing) money supply, it will increase (decrease) the liquidity of the 33 stock market In addition, inflation has the negative effect on all liquidity variables, showing the liquidity of the stock market will suffer when there is an increase in consumer price index 5.1.3 The mechanism of monetary policy’s impact on stock price and liquidity in Vietnam’s stock market The research results clarify the mechanism of impact of monetary policy on the stock market in Vietnam as follows: First, when the SBV increases the total means of payment (or money supply), it has the effect of lowering interest rates in the market According to the monetary theory, the expansion of money supply will increase the demand for securities, leading to the increase of stock prices on the stock market As the SBV expands the currency, it has the effect of increasing the demand for stocks leading to a rise in share prices on the Vietnamese stock market Secondly, under the discounted dividend model, the expansion of money supply reduces the market interest rate, including the borrowing rate of enterprises, thereby stimulating enterprises to increase investment and expand production and increase profitability This mechanism is also evident in Vietnam, which can be inferred through the performance reports of listed companies in the period of loosening monetary According to the annual report of the SSC in 2008 and 2011 (these are two years of tightened money supply), the performance of listed companies was lower than that of the previous year But over the years 2009, 2010 and the period 2013 -2016, a report from SSC showed that business results of companies significantly improved and many companies achieved high growth Thirdly, the mechanism of impact of monetary policy on the liquidity of the stock market in Vietnam is proven through its impact on the marginal borrowing of investors As the SBV loosened its monetary policy by increasing its money supply and lowering lending rates on the market, this canurge investors to increase margin borrowing to buy stocks As a result, the market liquidity increases sharply On the contrary, in the periods when the SBV tightens monetary policy, interest rates increase, and when SBV imposes more restrictions on securities investment loans on credit institutions, stock market liquidity takes the plunge 34 5.2 Recommendations for the administration of monetary policy 5.2.1 Moves from controlling money supply to controlling interest rates Judged by the way SBV implemented its monetary policy, SBV has shown that it uses money supply M2 as intermediary objective Choosing to control money supply will cause interest rates in the market to fluctuate according to money demand and the central bank can not control interest rates Meanwhile, in order to achieve its goal, the central bank needs to use tools to keep interest rates unchanged Interest rates are the link between the financial system and the real economy, so steady growth also means maintaining relatively stable inflation rate (Mishkin, 2013) In addition, the central bank does not mention the objectives of the monetary policy, but operates by regulating many factors such as market interest rates, VND / USD exchange rates and the banking system's reserves Therefore, the SBV should consider selecting interbank interest rates the operational objectives of monetary policy, andshould switch from controlling money supply to interest rate control SBV should announce the direction of how it regulates interest rates to the publicso that investors can monitor and predict such a move 5.2.2 To implement the monetary policy in the direction of stabilizing prices and stabilizing the financial system Judged from the SBV’s implementation of monetary policy from 2002 to 2011, the SBV has pursued multi-objective monetary policy in which the objective of economic growth is the most significant However, with high inflation rates in 2008 and 2011 as a consequence of the previous expansion of money supply, the SBV limited its response to market movements, especially price volatility Thus, price stability must be the primary goal of monetary policy in the long run, because it helps with economic growth as well as unemployment relief The State Bank of Vietnam should consider and set a concrete roadmap, creating the prerequisites for the application of inflationtargeting monetary policy in combination with financial stability in Vietnam Maintaining a moderate inflation rate in the long run will not only support long-term economic growth but also contribute to the stable development of the stock market 35 5.2.3 Cooperate with other agencies to support the development of the securities market It is necessary to develop a coordination mechanism for managing policies related to the stock market From the reality of SBV’s implementation and research results, it is clear that both loosening and tightening monetary policy can affect the liquidity of the stock market The stock market is also very sensitive to the expansion or narrowing of credit of commercial banks These manifestations can only be overcome by improving the quality of market restructuring and market participants To promote the role of the stock market as a medium and long-term capital mobilization channel for enterprises, to serve production and business, to attract idle capital of individuals and organizations domestically and internationally, SBV and SSC should closely cooperate in issuing regulations on how to operate the market Rules include legal frameworks, mechanisms, policies, and internationally accepted practices 5.3 Recommendations for investors According to the research results, investors should closely monitor the evolution of the consumer price index, the direction of monetary policy implementation announced by the State Bank at the beginning of each year and then forecast the future changesin interest rates According to the dividend discount model, the determination of a suitable discount rate helps investors determine the right price for the stock, which is the basis for making appropriate investment decisions In addition, the prediction of interest rates also helps investors decide to use margin trading at a reasonable rate when interest rates are low to increase profits 5.4 Limitations and research direction of the thesis The thesis also draws the limitations of the study and suggests future research, for the research sample and the scope of the study Conclusion of Chapter This chapter summarizes the research results from two angles, namely, assessing the impact of monetary policy on stock prices and liquidity of Vietnam stock market Based on the results of research and combined with the actual implementation of monetary policy and the stock market, some recommendations for policy makers are given to monetary policy administrators as well as securities investors The thesis also outlines the new research contributions and presents the limitations of the research and directions for further research ... Expectations on the impact of monetary policy on the liquidity of the stock market are shown in Table 3.1 below: Table 3.1 Expectations of the impact of monetary policy on liquidity of the stock market. .. approaches The first approach is to study the impact of monetary policy on the stock market, which considers the role of the stock market as a channel to convey the impact of the monetary policy to the. .. from the management of monetary policy of the State Bank of Vietnam has impact on the market development The thesis entitled "The Impact of Monetary Policy on the 3 Stock Market" was conducted