The impacts of capital flows on vietnam stock market

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACTS OF CAPITAL FLOWS ON VIETNAM STOCK MARKET BY TRAN TUYET HANH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, NOVEMBER 2012 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACTS OF CAPITAL FLOWS ON VIETNAM STOCK MARKET A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TRAN TUYET HANH Academic Supervisor: DR NGUYEN HOANG VU HO CHI MINH CITY, NOVEMBER 2012 DECLARATION I hereby certify that the substance of the thesis has not already been submitted for any degree and is not being currently submitted for any other degree I also certify that, to the best of my knowledge, and help received in preparing the thesis and all sources used have been acknowledged in the thesis Signature TRAN TUYET HANH Date: ACKNOWLEDGMENTS i I would like to express my gratitude to all those who gave me the possibility to complete this thesis I am deeply grateful to my supervisor Dr Nguyen Hoang Vu from Department of Mathematic and Statistics, Dr Nguyen Trong Hoai-Vice President, Dr Pham Khanh Nam from Department of Development Economics , University of Economics Ho Chi Minh City whose support, stimulating suggestions and encouragement helped me in all the time of research for writing this thesis I am also very grateful to all lecturers of the Vietnam-Netherlands Programme for giving me knowledge and guidance to fulfill the M.A Programme I would like to thank all the members of the Vietnam-Netherlands Program, especially, VNP Library for helping me to have necessary documents and research papers during my completion of the thesis Finally, I am indebted to my parents whose love, sympathy and encouragement enabled me to complete this thesis I am also thankful to my classmates for their warm encouragement ACRONYMS AND ABBREVIATIONS FDI Foreign Direct Investment FPI Foreign Portfolio Investment FII Foreign Indirect Investment WTO World Trade Organization VSM Vietnam Stock Market HOSE Hochiminhcity Stock Exchange HNX Hanoi Stock Exchange PIE Price-earning VN-Index Vietnam Index IPO Initial Public Offering OTC Over The Counter Market LDCs Less Developed Countries liP Index of Industrial Production VAR Vector Auto regression ADF Augmented Dickey Fuller pp Phillips Peron ECM Error Correction Model SBV State Bank of Vietnam sse State Securities Commission of Vietnam CPI Consumer Price Index ABSTRACT This thesis investigates the impacts of FPI flows on Vietnam stock market (VSM) In other words, we aim to examine whether a long-run or short-run impact of FPI flows on VSM exists or not And, if any, how long does it take for changes to be fully effective? We use the mol!thly time series data of VN-Index and FPI flows from July 2000 to June 2012 to analysis In order to calculate the growth rate of VN-Index, we take logarithm ofVN-Index series and denote it as Delta-VN Then, we adopt various techniques on time series regression such as unit root test using both Augmented Dickey Fuller (ADF) test and Phillips Peron (PP) test for stationary, co-integration test using Engle &Granger approach and Johansen approach for examining the existence of a long-run relationship between two variables, Granger Causality test for checking the existence and direction of causality relationship between them, error correction models for investigating the existence of short-term relationship Moreover, we also apply Serial Correlation LM test, Heteroskedasticity ARCH test, Histogram Normality test to check the appropriateness of the estimated model The research findings show that there is an unilateral effect from FPI flows on Vietnam stock returns The thesis also illustrates an existence of a long-run impact between them when an increase in FPI flows can lead to 86% of increase in Vietnam equity returns On the other hand, there is also a short-run impact from FPI on VSM which would be decreasing gradually since the third month TABLE OF CONTENTS CHAPTER INTRODUCTION ! 1.1 Problem statement1 1.2 Research objectives 1.3 Research questions 1.4 Research scope 1.5 Structure of the thesis CHAPTER LITERATURE REVIEW 2.1 The role ofFPI on economic development 2.2 The role of Vietnam Stock Market 2.3 Theoretical framework 2.3.1Foreign Portfolio Investment and stock market 2.3.2 Conceptual framework 11 2.4 Empirical studies 13 2.5 Suggested research model 15 2.6 Chapter remark 16 CHAPTER3 RESEARCH METHODOLOGY&DATA COLLECTION 17 Econometric techniques 17 1.1 Stationary and unit root tests 17 1.2 Co integration 18 1.3 Granger Causality tests 18 3.1.4Error correction mechanism 19 • 3.2 Data collection 20 3 Data analysis 22 3.3.1 Dependent variable: Delta-VN 22 3.3.2 Independent variable: FPI 23 3.3.3 Interaction between FPI flows and VN-Index 23 13.3 Chapter remark 33 CHAPTER EMPIRICAL ANALYSIS 35 4.1 Structural Break Point test 35 4.2 Unit root test 35 4.3 Co-integration test 36 4.4 Granger Causality test 38 4.5 Error Correction Model 39 4.6 Chapter remark 38 CHAPTER CONCLUSION AND POLICY RECOMMENDATIONS 43 5.1 Main findings 5.2 Policy recommendation 44 5.3 Research limitation and suggestion for further study 45 REFERENCES 46 APPENDIX A DESCRIPTIVE STATISTIC 49 LIST OF GRAPHS Graph 3.3-1: Delta-VN=log(VN-IndexJVN-Index(-1)) 22 I Graph 3.3-2: Foreign portfolio investment flows (FPI) to Vietnam from July 2000 to June 2012 23 Graph 3.3-3: FPI&VN-Index from July 2000 to June 2012 24 LIST OF TABLES Table 4.1-1: Summary of structural breakpoint test 35 'fable 4.2-1: Summary of unit root test results 36 Table 4.3-1: Summary of unit root test results for residuals using ADF&PP test: Engle &Granger test 36 Table 4.3-2: Summary of Johansen cointegration tes~··················································· 37 Table 4.3-3: Summary of Trace Statistic value 38 Table 4.4-1: Summary of Granger Causality test 38 Table 4.5-1: Summary of testing Vector Error Correction Model 39 Table 4.5-2: Summary of the tests for approriateness of the estimated model .41 LIST OF FIGURES Figure A-1: Structural Breakpoint Test for Delta-VN variable 49 I figure A-2: Structural Breakpoint Test for fPI variable 49 figure A-3: Unit root test for Delta-VN variable 50 figure A-4: Unit root test for FPI variable 52 figure A-5: Cointegration test (Engle &Granger method) for residuals from the linear regression for two variables 54 figure A-6: Results of the Johansen Cointegration test for model2 55 figure A-7: Results of the Johansen Cointegration test for model3 57 Figure A-8: Results of the Johansen Cointegration test for model4 58 Figure A-9: Results of the Granger Causality test 59 figure A-1 0: Results of the Vector Error Correction Model 60 Figure A-ll: Results of the Wald test 61 Figure A-12: Results of the Serial Correlation test 61 Figure A-13: Results of the Heteroscedastiscity test 63 Figure A-14: Results of the Histogram Normality test 64 • CHAPTER 1: INTRODUCTION I This chapter will introduce the thesis topic and identify the problems going to be analyzed in the thesis It gives the research objectives, research questions and research scope This chapter also provides the structure of thesis 1.1 After the official joint to the World Trade Organiz has been opening the financial market, economy a advantages of lower production cost and investme Asian countries, Vietnam has become an attractive Vietnam is making a good impression on inter expanding rapidly in emerging market and obta • global policies on foreign investment restrictions in the stock market, Vietnam has further • enhanced attraction to international equity investor About the regulations on foreign share holding percentage of foreign holding rate from 30% up t rather suitable for Vietnam Stock Market (VSM) in About the regulations on profit transferring outflow investors we have offered duty-free on this kin Vietnamese foreigners and foreign residents On July 28, 2012 Vietnam stock market (VSM) notable achievements when it reached more than 1,690 public companies, 105 securities compan companies and 23 stock investment funds Mark • *MacKinnon (1996) one-sided p-values Augmented Dickey-Fuller Test Equation Dependent Variable: D(FPI,2) Method: Least Squares Date: 10/20/12 Time: 10:58 Sample (adjusted): 2001 M07 2012M06 Included observations: 132 after adjustments • *MacKinnon (1996) one-sided p-values 53 Residual variance (no correction) HAC corrected variance (Bartlett kernel) 593694.0 717377.4 Phillips-Perron Test Equation Dependent Variable: D(FPI) Method: Least Squares Date: 10/23/12 Time: 22:08 Sample (adjusted): 2000M08 2012M06 Included observations: 143 after adjustments Variable FPI(-1) R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat COINTEGRATION TEST Figure A-5: Co- integration test (Engle & Granger method) for residuals from the linear regression oftwo variables Null Hypothesis: RES03 has a unit root Exogenous: None Lag Length: (Automatic based on SIC, MAXLAG=13) Augmented Dickey-Fuller test statistic Test critical values: *MacKinnon (1996) one-sided p-values • 54 ~ R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat Null Hypothesis: RES03 has a unit root Exogenous: None Bandwidth: (Newey-West using Bartlett kernel) Phillips-Perron test statistic Test critical values: *MacKinnon (1996) ~me-sided p-values Residual variance (no correction) HAC corrected variance (Bartlett kernel) Phillips-Perron Test Equation Dependent Variable: D(RES03) Method: Least Squares Date: 10/20/12 Time: 22:30 Sample (adjusted): 2000M09 2012M06 Included observations: 142 after adjustments R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat ' THREE MODELS IN TESTING FOR COINTEGRATION Figure A-6: Results ofthe Johansen test for model 2: Date: 10/22/12 Time: 00:29 Sample (adjusted): 2001 M09 2012M06 55 Included observations: 130 after adjustments Trend assumption: No deterministic trend (restricted constant) i Series: DELTA_VN FPI Lags interval (in first differences): to 12 Unrestricted Cointegration Rank Test (Trace) Hypothesized No of CE(s) None* At most * Trace test indicates cointegrating eqn(s) at the 0.051evel * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug- Michelis (1999) p-values Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Hypothesized No of CE(s) None At most * Max-eigenvalue test indicates no cointegration at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=l): ' 56 I Figure A-7: Results of theJohansen test/or model : Date: 10/22/12 Time: 00:32 Sample (adjusted): 2001M09 2012M06 Included observations: 130 after adjustments Trend assumption: Linear deterministic trend Series: DELTA_VN FPI Lags interval (in first differences): to 12 Unrestricted Cointegration Rank Test (Trace) Hypothesized No of CE(s) None * At most * Trace test indicates cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Hypothesized No of CE(s) None * At most * Max-eigenvalue test indicates cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=I): DELTA_VN -33.09056 -0.962714 FPI -9.74E-05 -0.001951 Unrestricted Adjustment Coefficients (alpha): O(OELTA_VN) O(FPI) 0.023697 -79.01384 Cointegrating Equation(s): 0.013242 167.8102 Log likelihood -884.9408 Normalized cointegrating coefficients (standard error in parentheses) OELTA_VN FPI 1.000000 2.94E-06 (1.7E-05) Adjustment coefficients (standard error in parentheses) O(OELTA_VN) -0.784152 57 - - D(FPI) (0.27232) 2614.612 (2113.19) Figure A-8: Results of the Johansen test for model4: Date: 10/22/12 Sample (adjusted): 2001 M09 2012M06 Included observations: 130 after adjustments Trend assumption: Linear deterministic trend (restricted) Series: DELTA_VN FPI Lags interval (in first differences): to 12 Unrestricted Cointegration Rank Test (Trace) Hypothesized No of CE(s) None* At most Trace test indicates cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Hypothesized No of CE(s) None At most Max-eigenvalue test indicates no cointegration at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted Cointegrating Coefficients (normalized by b'*S11*b=l): Normalized cointegrating coefficients (standard error in parentheses) 58 DELTA_VN 1.000000 FPI 1.65E-05 (2.0E-05) @TREND(OOM08 ) -0.000132 (0.00029) Adjustment coefficients (standard error in parentheses) D(DELTA_VN) D(FPI) -0.863239 (0.27027) 1507.857 (2125.43) GRANGER CAUSALITY TEST Figure A-9: Results of the Granger Causality test: VEC Granger Causality/Block Exogeneity Wald Tests Date: 10/23112 Time: 00:17 Sample: 2000M07 2012M06 Included observations: 130 Dependent variable: D(DELTA_VN) Excluded D(FPI) All Dependent variable: D(FPI) Excluded D(DELTA_VN) All 59 VECTOR ERROR CORRECTION MODEL Figure A-10: Results ofthe vector error correction model: Dependent Variable: D(DELTA_VN) Method: Least Squares Date: 10/22/12 Time: 23:39 Sample (adjusted): 2001M09 2012M06 Included observations: 130 after adjustments D(DELTA_VN) = C(1)*( DELTA_VN(-1) + 1.65037471191E-05*FPI(-1)0.000131596905459*@TREND(OOM07) + 0.00333129697177) + C(2) *D(DELTA_VN(-1)) + C(3)*D(DELTA_VN(-2)) + C(4)*D(DELTA_VN(-3)) + C(5)*D(DELTA_VN(-4)) + C(6)*D(DELTA_VN(-5)) + C(7) *D(DELTA_VN(-6)) + C(8)*D(DELTA_VN(-7)) + C(9)*D(DELTA_VN(-8)) + C(10)*D(DELTA_VN(-9)) + C(11)*D(DELTA_VN(-10)) + C(12) *D(DELTA_VN(-11)) + C(13)*D(DELTA_VN(-12)) + C(14)*D(FPI(-1)) + C(15)*D(FPI(-2)) + C(16)*D(FPI(-3)) + C(17)*D(FPI(-4)) + C(18)*D(FPI( -5)) + C(19)*D(FPI(-6)) + C(20)*D(FPI(-7)) + C(21)*D(FPI(-8)) + C(22) *D(FPI(-9)) + C(23)*D(FPI(-10)) + C(24)*D(FPI(-11)) + C(25)*D(FPI( -12)) + C(26) 60 WALT TEST TO TEST THE SHORT RUN CAUSALITY Figure A-ll: Results ofthe Wald test: Wald Test: Equation: Untitled Test Statistic F-statistic Chi-square Null Hypothesis Summary: Normalized Restriction (= 0) Restrictions are linear in coefficients SERIAL CORRELATION Figure A-12: Results ofthe Serial Correlation test: Breusch-Godfrey Serial Correlation LM Test: F-statistic 0.007857 Prob F(2, 102) 61 0.9922 Ob$*R-squared Test Equation: Dependent Variable: RESID Method: Least Squares Date: 10/23/12 Time: 00:04 Sample: 2001M09 2012M06 Included observations: 130 Presample missing value lagged residuals set to zero R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) 62 HETEROSCEDASTISCITY -ARCH TEST Figure A-13: Results ofthe Heteroskedasticity test: Heteroskedasticity Test: ARCH F-statistic Obs*R-squared Test Equation: Dependent Variable: RESID"2 Method: Least Squares Date: 10/23/12 Time: 13:11 Sample (adjusted): 2001 M11 2012M06 Included observations: 128 after adjustments R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) 63 I ~ISTOGRAM-NORMALITY TEST • I Figure A-14: Results ofthe Histogram Normality test: 24 20 16 12 • • • 64 ...UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACTS OF CAPITAL FLOWS ON VIETNAM. .. out of a stock But no one can deny some positive impacts of FPI on stock markets First, foreign portfolio investors are professionals on stock markets So, they always purchase stocks on the basic... 10.1% of the value The second reason was the low liquidity in the VSM as the total market 28 capitalization in 2008 was only US$13 billions which was too smaller than other Asian stock markets