Application of fama french factors to industrial corporations in vietnam stock market bachelor thesis of banking and finance

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY BACHELOR THESIS Major: Financial – Banking Number : 7340201 Topic: APPLICATION OF FAMA FINANCIAL MODEL TO INDUSTRIAL CORPORATIONS IN VIETNAM Student’s name : Dương Đại Phát Student’s ID : 030631152010 Guiding teacher : Msc Nguy n Minh Nh t HCMC, February 2021 MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY BACHELOR THESIS Major: Financial – Banking Number : 52340201 Topic: APPLICATION OF FAMA FINANCIAL MODEL TO INDUSTRIAL CORPORATIONS IN VIETNAM Student’s name : Dương Đại Phát Student’s ID : 030631152010 Guiding teacher : Msc Nguy n Minh Nh t HCMC, February 2021 ABSTRACT The study concentrates on one of the primary advantage pricing models which offer a selection of selections for investors enthusiastic about evaluating returns From 2014 to 2019, the writer selects the Fama Five-factor French style and uses every aspect to calculate hundred listed manufacturing businesses in Vietnam To be able to make sure that the regression test is wholly explicable, the writer additionally determines Gibbons et al (1989) GRS F assay if all of the sorted portfolios will likely show beneficial results in the study The results show that the factor MRP (market component) is actually a significant professional in all the portfolios and that SMBs play a good role than many other threes The time series average return of these companies could be defined by Fama French Five-factor variables which don't generate pricing errors Keywords: Fama French five-factor, asset pricing model; market capitalization; bookto-market equity; profitability; investment; trading businesses DECLARATION OF AUTHENTICITY I affirm that I wrote this and have provided credit for each quote I certify that I have completed all processes and methods faithfully and honestly I mentioned to all of the people who contributed significantly to this effort I would like to report that all representations and material found here are valid, right and authentic Ho Chi Minh City, February 2021 ACKNOWLEGEMENTS First of all, I'd like to express my appreciation to Mr Nguyen Minh Nhat for providing me with helpful advice and motivation during this project Secondly, I would like to thank my family and friends who have been there every step of the way during my four years in Banking University Lastly, best wishes to my lecturers and BUH for their knowledge, encouragement, and understanding COMMENTS FROM GUILDING TEACHER HCMC, .2021 Signature of guiding teacher Table of Contents CHAPTER 1: INTRODUCTION 1.1 Reason to research 1.2 Research objective 1.3 Research questions 1.4 Research subject and range 10 1.5 Methodlogy 10 1.6 Research contribution 11 1.7 Research outline 11 CHAPTER 2: LITERATURE REVIEW AND PREVIOUS RESEARCHES 13 2.1 Literature review 13 2.1.1 Arbitrage Pricing Theory (APT) 13 2.1.2 The Fama French three-factor model 14 2.1.3 Carhart four factor model 16 2.1.4 The Fama French five factor model 17 2.2 Previous researches 19 2.2.2 Previous researches from developed countries 19 2.2.3 Previous researches in developing countries 21 2.2.4 Previous research in Vietnam 23 CHAPTER 3: DATA AND METHODOLOGY 26 3.1 Data construction and processing method 26 3.2 Model 27 3.3 Factors calculating 31 3.4 Testing methods and Hypotheses of research 32 CHAPTER 4: EMPERICAL RESULTS 35 4.1 Descriptive statistics 35 4.2 Regression details 37 4.3 Relevant test 39 4.4 About the result 40 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 42 5.1 Conclusion 42 5.2 Recommendations 43 REFERENCES 47 CHAPTER 1: INTRODUCTION 1.1 Reason to research The financial exchange and the banking sector are critical aspects of the national economy Early years, clearly for all investors (institutional or individual), the key aim is to get the best possible return from investments Choosing stocks for your portfolio are close to gambling Knowing the statesman will definitely have a chance to find the side which will benefit a certain match A business share price can change regularly to match its actual market valuation, resulting in higher profit margins and thorough examination of pricing fluctuations, risk, past success and unpredictable future Investors like to consider whether or not their investments are successful before buying Understanding of different fundamental forces is the key option to make successful investment, the same with the skilled bettor that the football game requires to be understood which influences can carry the outcome During over one hundred years of study, researchers have identified many pricing models Studies started in the mid-1960s and went on as part of the global economy, usually including the Capital Asset Pricing Model (CAPM) from Sharpe (1964), Lintner (1965) and Mossin (1968) (1966) In this model, only beta (market risk factor) is used to calculate the anticipated return of the stock There is a considerable denial regarding the reliability of CAPM theory According to Basu (1977), he noticed that all the above alternative interpretations fail absolutely in the Indian sense As a result, Rolf W Banz (1981) found that the CAPM was misspecified and that others have accepted that the calculation is inadequate for NYSE stocks After that, Fama and French conducted observational research that investigated the relationship between income and stocks, company scale, B/M ratios and beta Finally, the French three-factor model was released This model was later replaced the CAPM model after 30 years of use The three-factor model was, by all accounts, a popular model for forecasting business demand in the 1980s and in the future The Fama-French three-factor model was checked for its usage in the global capital markets in Australia, Canada, Germany, France, Japan, the United Kingdom and the United States Price and scale play a part in both sectors In 1997, Mark Carhart substituted the three-factor model with a revised four-factor model that used a momentum factor to measure the monthly valuation of an asset The Carhart model is also used as an example to evaluate and administer mutual funds Analysis has shown that the complementarity effect can affect returns for the plurality, but not everyone Novy-Marx (2013) concludes that businesses with significantly higher earnings produce significantly more sales Aharoni, Grundy, and Zeng (2013) find that a rise in spending and a decline in profit margins were associated with an increase in profit From these results, Fama and French developed that diversification enhances return A five-factor model for understanding financial decision-making was released in the Journal of Financial Economics in early 2015 Their aim is to remove gains from the equation and prioritize investments (CMA-Conservative Minus Aggressive Investment) This model has been tested in 23 developing markets, and reported to be successful in four regions – North America, Japan, the Asia Pacific and Europe (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, UK, ) The Fama five-factor model is attracting massive interest from investors in general and from the equity market in particular However, most researchers have not yet explicitly solved the problem In the analysis of Vo Hong Duc and Mai Duy Tan (2014), they graded the portfolio by running several regression models and splitting the portfolio according to their findings However, implementing the same portfolios will lead to surprise, such as various sets of variables that might be associated and bound to each other In comparison, modelling portfolios on just 14 individuals is not necessary to achieve reputation However, to the best of the author's understanding, "Application of Fama French factors to industrial companies in Viet Nam stock market", I think the article would analyze the introduction of the concept into the Vietnam stock market and help investors maximizing their value in the stock market 1.2 Research objective The aim of this thesis was to: Firstly, analyze the influence of the five-factor model, including industry, scale, valuation, benefit, and investment factors has on listed industrial stocks returns in the Vietnam stock market Secondly, describe the relevant valuation model and the fluctuation of the Vietnamese capital market returns in a simple and detailed manner Finally, offer several ideas on how owners, regulators, and other stockholders may enhance the continuing management of the fund 1.3 Research questions To accomplish the above study's purpose, these are the questions it seeks to address: - - Does a company's book-to-market ratio, profitability, scale, market premium, and investment risk impact the portfolio's returns? Is there a favorable or negative connection between the stock results and the external factors? The Fama French five-factor model is sufficient method for describing the shifts in returns in the equity market in Viet Nam? Why investors make use of analysis to raise equity capital and reduce investment risks? 1.4 Research subject and range The study emphasis is on utilizing the Fama French Five-Factor Pricing Model for mentioned manufacturing firms on the HNX and HOSE exchanges Research range: - The time frame for the study is from 2014 to 2019 Prioritizing the objective to create an accurate analysis, any earlier return data is disregarded in this study - Firms from the study are expected to be majored in Industrials, listed as securities, and need to provide accessible data concerning Market Price, Total Assets, Total Liabilities, Shares Outstanding, Book Value and Treasury bill taken from the VNCB from the three-month duration of the survey - Space: This analysis used closed market details of the reported market capitalization of industrial firms on HOSE and HNX Companies outside of the banking industry, including insurance companies, insurers and brokerage companies, are not listed in these rankings 1.5 Methodlogy The aim of the analysis was to evaluate the Fama French Five Factor Model in Vietnamese industrial firms, a quantitative methodology was implemented: - Follow the Ordinary Least Square (OLS) procedure to quantify the Betas, and analyze the association between variables and portfolios Using Gibbons, Ross, and Shanken (1989) GRS model to approximate the fundamental influence of the model on the list of firms Excel Office is used to synthesize data and equations accompanied by the usage of Stata version 13 to execute regression and other related hypothesis testing procedures Research model: ( ) Where: the expected return on asset i, the risk-free rate of Treasury bill, the excess market return, , (Small minus Big) the size factor, (High minus Low) the value factor, (Robust minus Weakness) the high stock sale Investors should not need to purchase securities which are supposed to have decent results in order to experience comparable earnings Shares of non-profit firms of low stock valuation still appear to offer strong return in the future 5.2.3 Recommendations for stock market in Vietnam Large businesses with higher ratio of B/M would be forced to suffer from the shifting of business climate, uncertain investment pattern and decreasing earnings A business can make the scales of stock and properties closely and then not get too reliant on the stock market In the other side, if businesses trust in their judgment that the economic environment will change in the future, they could decrease their size and instead their B/M ratio will rise Low operating margin would impact businesses and it will have low revenues This is good for business since successful businesses can reduce the influence of other forms of risks, particularly market and valuation risks If there is contraction, then the net performance will be poor If the balance-sheet does not have a high B/M ratio, then there would be low operating profit 5.2.4 Limitations of the study There are certain limitations in this research The data range of this study applies for years, and specific only in industrial majority because of the short time research, which cannot represent the whole market and reflect the view properly of these factors to stocks average return Consequently, both from the size and from the time length, this database is nearly small From the methodology perspective, according to Fama French (2014), there are many ways to divide the portfolios as mentioned on Chapter 3.3 but the author only use 2x3 sort factors in this paper The author also did not use the full two-way Fama French regression, which is cross-sectional regression still remain Instead of cross-sectional, the author choose the GRS F-test to figure out another way to examine the power of the model 5.2.5 Researches for further research Further research on pricing formulas may provide estimated meaning by lowering SMB and arranging portfolios according to other variables Future studies may possibly instead allow use of business portfolios or make a different evaluation on small-cap, mid-cap, and large-cap More studies would need to be done to determine whether such segregation actually occurs In conclusion, Fama and French (2016) also observed that a cash profitability performs higher than an operational profitability under a five-factor model Testing this result and analyzing productivity results in Vietnam markets may yield valuable insights into the reasons for the higher productivity losses in all study recovery times It is necessary to remember that looking past the 5-figure program's imperfection is always a struggle Finally, findings of the backward calculation of the model gave that there may is another element (ROA, EBIT ) that influences stock prices on the Vietnam stock exchange REFERENCES Domestic references: Trương Đông Lộc and Dương Thị Hồng Trang (2014), “Mơ hình nhân tố Fama-French: Các chứng thực nghiệm từ Sở giao dịch chứng khốn Thành phố Hồ Chí Minh”, Cần Thơ University Science Magazine Võ Hồng Đức and Mai Duy Tân (2014), “Sự phù hợp mơ hình FamaFrench nhân tố cho thị trường chứng khoán Việt Nam”, Technology banking magazine, no 101, pages 2-20 Nguy n Thị Thúy Nhi (2016), “Kiểm định mơ hình Fama-French nhân tố mơ hình Q bốn nhân tố thị trường chứng khoán Việt Nam” Open University HCMC Huỳnh Ngọc Minh Trâm (2017), “V n dụng mơ hình Fama French nhân tố để ước lượng tỷ suất lợi tức kỳ vọng cổ phiếu niêm yết sàn giao dịch chứng khốn Hồ Chí Minh”, Da Nang Economic University Foreign references: Ross S (1976), "The Arbitrage theory of capital asset pricing", Journal of Economic Theory Nartea et al (2009), “Extreme returns in emerging stock markets: evidence of a MAX effect in South Korea” Merton H Miller and Franco Modigliani (1961), “Dividend Policy, Growth, and the Valuation of Shares” Michael C Jensen, Fisher Black (1972), “The Capital Asset Pricing Model: Some Empirical Tests” Hou et al (2012, 2015), “An Empirical Assessment of the Q-Factor Model”, The Lahore Journal of Economics 10 Robert Novy-Marx (2012), “The Other Side of Value: The Gross Profitability Premium” 11 Carthart, M (1997), “On persistence of Mutual Fund Performance”, The Journal of Finance 12 John H Cochrane (2011), “Presidential Address: Discount Rates” 13 Narasimhan Jegadeesh, Sheridan Titman (2001); “Profitability of Momentum Strategies: An Evaluation of Alternative Explanations” 14 Fama, Eugene F.; MacBeth, James D (1973), “Risk, Return, and Equilibrium: Empirical Tests” 15 JH Cochrane (2011), “Presidential address: Discount rates”, The Journal of Finance 16 Eugene F Fama, Kenneth R French (2014), “A five-factor asset pricing model”, Journal of Finance 17 Souad Ajili (2002), “Capital Asset Pricing Model and three factor model of Fama and French revisited in the case of France” 18 John M Griffin (2002), “Are the Fama and French Factors Global or CountrySpecific?” 19 Keiichi Kubota and Hitoshi Takehara (2017), “Does the Fama and French Five‐ Factor Model work well in Japan?” 20 Grace Xing Hu, Can Chen, Yuan Shao, Jiang Wang (2018); “Fama–French in China: Size and Value factors in Chinese Stock Returns” 21 Harshita, S Singh, Surendra S Yadav (2015), “Indian Stock Market and the Asset Pricing Models” 22 Songül Kakilli Acaravci, Yunus Karaomer (2017), “Fama-French five factor model: Evidence from Turkey” 23 Ferson, W E , and C R Harvey (1999), “Conditioning variables and the crosssection of stock returns,” Journal of Finance 24 Kent Daniel, Sheridan Titman, and K C John Wei (2001); “Explaining the Cross-Section of Stock Returns in Japan: Factors or Characteristics?”, Journal of Finance 25 Heston, S L , Rouwenhorst, K G , & Wessels, R E (1999), “The Role of Beta and Size in the Cross-Section of European Stock Returns”, European Financial Management 26 Gibbons, M R , Ross, S A , Shanken J (1989); “A test of the efficiency of a given portfolio”, Econometrica APPENDIX Multicollinearity test Make OLS Regression test with 18 sorted portfolios:  Regression of SMB- SN with Fama French five-factor  Regression of SMB- BH with Fama French five-factor  Regression of CMA- BA with Fama French five-factor  Regression of CMA- BC with Fama French five-factor  Regression of CMA-BN with Fama French five-factor  Regression of CMA-SA with Fama French five-factor  Regression of CMA-SC with Fama French five-factor  Regression of CMA-SN with Fama French five-factor  Regression of RMW-BN with Fama French five-factor  Regression of RMW-BR with Fama French five-factor  Regression of RMW-BW with Fama French five-factor  Regression of RMW-SN with Fama French five-factor  Regression of RMW- BR with Fama French five-factor  Regression of RMW- SW with Fama French five-factor  Regression of SMB- BL with Fama French five-factor  Regression of SMB- BN with Fama French five-factor  Regression of SMB- SH with Fama French five-factor  Regression of SMB- SL with Fama French five-factor Correlations test VIF test Heteroskedasticity White test GRS test ...MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY OF HO CHI MINH CITY BACHELOR THESIS Major: Financial – Banking Number : 52340201 Topic: APPLICATION OF FAMA FINANCIAL... However, to the best of the author's understanding, "Application of Fama French factors to industrial companies in Viet Nam stock market" , I think the article would analyze the introduction of the... position in understanding market portfolio returns of Japanese stocks (contradictory to the Fama and French (2010) findings) Vietnam stock market also lacks scientific research promoting the use of