Impacts of the global financial crisis on an emerging market the case of vietnam

UNIVERSITY OF WESTERN SYDNEY DOCTORAL THESIS Impacts of the Global Financial Crisis on an Emerging Market: The Case of Vietnam Phuong Thao Tran 2013 Impacts of the Global Financial Crisis on an Emerging Market: The Case of Vietnam Phuong Thao Tran A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Business Administration at the University of Western Sydney March 2013 Acknowledgements This thesis is the result of a process during which I have acquired a great deal of knowledge and many skills that are invaluable for my research career The thesis would not have been possible without the support and assistance of the following people My utmost gratitude goes to the members in my supervisory panel, who have offered supportive and constructive supervision throughout my candidature I would like to express my deepest gratitude to the Chair of my supervisory panel, Associate Professor Craig Ellis, for his excellent guidance and precious suggestions on my thesis I would also like to express my utmost gratitude to my co-supervisor, Associate Professor Kevin Daly, for his valuable suggestions and support I am deeply grateful to Ms Maike Sundmacher, my co-supervisor, for her continuous support and encouragement throughout my DBA candidature I would also like to thank sincerely the staff in the School of Business, University of Western Sydney for their support during my DBA journey My thanks are due to Dr Anil Mishra for initial discussions of my research, Dr Maria Estela Varua for her assistance in fundamental knowledge on econometric analysis, and Associate Professor Terry Sloan for his useful guidance on carrying out research I would like to express my gratitude to the Managerial Board of the University of Economics Ho Chi Minh City, Vietnam (UEH) and the World Bank for financially supporting for my research My sincere thanks are also due to the management and staff in the Doctor of Business Administration Program (UEH) as well as my colleagues in the Banking Faculty (UEH) for their support throughout my research Last, but not least, I would like to deeply thank my parents, husband, little son and family members for their continuous support and encouragement during my DBA journey ii Statement of Authentication The work in the thesis has been prepared by me to partially fulfil the requirement requirements of the Doctor of Business Administration at the University of Western Sydney I declare that the work is a result of my own research except where acknowledgement of another’s work is made It is an original work and I have not submitted this material, either in whole or in part, for a higher degree at any other institution Signed: Date: 19 March 2013 Abstract Global equity markets have become increasingly integrated in recent decades This global integration and rapid information transmission suggests highly significant linkages across markets In the literature, researchers investigate three dominant market linkages: cointegration, causality and contagion Of these linkages, the first and second refer to a long-run and short-run relationship respectively while the third relates to the transmission of a shock among the markets during crisis periods Unlike other crises in recent decades, the Global Financial Crisis (GFC) in mid-2007 originated in the United States (US), the largest and most influential market in the world, and had severe effects on global equity markets Moreover, the crisis appeared to change linkages among global markets The extent to which the GFC has affected global equity markets, particularly markets that not have strong international trade links with the US, and whether global equity-market linkages have been influenced by the GFC are of increasing interest to researchers and practitioners The purpose of the thesis is to investigate the extent to which the GFC has affected the Vietnamese equity markets and its linkages to global equity markets Despite the significant growth in market capitalization over the last 10 years, studies on the Vietnamese equity market are sparse in the existing literature and there is a lack of research taking into account the influence of the GFC on the market as well as on its cross-market linkages Specifically therefore, the thesis examines impacts of the GFC on the Vietnamese equity market at market levels and on its linkages - including both short-run and long-run linkages - to global markets The linkages are based on two foundational theories; namely Purchasing Power Parity Theory and the Modern Portfolio Theory that are commonly discussed in the literature Also examined is whether a shock from the GFC spread to the Vietnamese equity market, and if so, how and where the shock originated To answer these issues, the thesis employs nine equity-market indices - Hong Kong, Japan, Korea, Singapore, Taiwan, the US, Malaysia, Thailand and Vietnam These countries are selected for the fact that they have continuously maintained leading positions in the FDI flows iv of Vietnam in recent years The period of study is from 28/7/2000 to 31/12/2010; the start date being the first trading day of the Vietnamese equity market The markets are separated into two groups, namely advanced markets (Hong Kong, Korea, Japan, Singapore, Taiwan and the US) and emerging markets (Malaysia, Thailand and Vietnam) Three main groups of empirical testing models are used to explore the impacts of the GFC on the Vietnamese equity markets Firstly, co-integration tests are used to examine the long-run linkages between and among the markets Second, causality tests are used to explore the causal or short-run linkages Finally, the contagion effect is investigated by employing constant and dynamic conditional correlation tests In these tests, the pre- and post-analysis technique is performed to examine the impacts of the GFC during sub-periods The empirical results of the thesis find much evidence in favour of the co-integration relationship between Vietnam and other markets during the entire sample and sub-periods for example, the co-movement of Vietnam–Hong Kong, Japan–US during the entire period; and Vietnam–Japan, Vietnam–Taiwan during the pre-crisis period However, the results overall are not consistent among the three bivariate co-integrating tests employed in the thesis Long-run co-movements are also evident in the relationships within the entire market, but not within the three emerging markets of Vietnam, Thailand and Malaysia A number of causal linkages are explored in the relationship between and among the Vietnamese and other selected markets The results show the feedback relationships between Vietnam and each of Hong Kong, Singapore and Korea during the entire period and subperiods In addition, we find that Vietnam is not Granger-caused to the US during the precrisis period; however, the mono-directional relationship from the US to Vietnam is revealed during the post-crisis period The multivariate Granger causality is found in the relationships among the groups of markets during the entire period and pre-crisis period - for example, Vietnam is influenced by the US, Hong Kong and Malaysia During the post-crisis period, Vietnam is Granger-caused by the co-integrating vectors and constant terms rather than lagged values of the endogenous variables in the dynamic structure We believe that these results are due to our parsimonious criterion in selecting the lag-length criteria and a relatively short time frame during the post-crisis period (1/3/2009–31/12/2010) in comparison to the pre-crisis period (28/7/2000–31/8/2008) v The empirical findings on the contagion effect are found in the relationships between the Vietnamese and other markets The constant conditional correlation reveals that during the pre-crisis period, the highest correlation is found between Vietnam and Japan; however, after the crisis, it switches to the relationship between the US and Vietnam In addition, among the markets, Japan is considered the first market influenced by the GFC because it has the highest correlation with the US The dynamic conditional correlation also highlights the transmission of the GFC to the entire market Among these markets, Hong Kong and Singapore are found to play important roles in transmitting the shock of the subprime mortgage crisis from the US to the other markets during the pre-crisis period; however, Japan is found to play this role during the crisis period The results also indicate a significant shock to the Vietnamese equity market during the crisis period vi Preface The preliminary empirical findings of the thesis have been presented at the conferences and published in the journals below: Conferences ‘The long-run relationship among the Southeast Asian equity markets’, International Conference on Economics Trade and Development, Bangkok, Thailand, 14–15 April 2012 (co-author K Daly) ‘Post global financial crisis and dynamic linkages among the East Asian equity markets’, 3rd Annual International Conference on Qualitative and Quantitative Economic Research (QQE), Bangkok, Thailand, 20–21 May 2013 (co-authors K Daly and C Ellis) Journals ‘The impacts of the Global Financial Crisis on Southeast Asian equity markets integration’, International Journal of Trade, Economics and Finance, vol 3, no 4, pp 299 – 304 (coauthor K Daly) ‘Transmission of the Global Financial Crisis to the East Asian equity markets’, International Journal of Economics and Finance, vol 5, no 5, pp 172 – 183 (co-authors K Daly and C Ellis) vii Contents Acknowledgements ii Statement of Authentication iii Abstract iv Preface vii Contents viii List of Tables xi List of Figures xiii List of Abbreviations xiv Chapter 1: Introduction 1.1 Overview 1.2 Background 1.2.1 Financial crises 1.2.2 Equity-market linkage 1.3 Research questions and methodology 1.3.1 Research questions 1.3.2 Research methodology 1.4 Scope and contributions 1.4.1 Scope 1.4.2 Contributions 10 1.5 Organisation 11 Chapter 2: Literature on Financial Crises and Equity-market Linkages 13 2.1 Overview 13 2.2 Background to financial crises 13 2.2.1 Definition 14 2.2.2 Causes and consequences 15 2.2.3 The Global Financial Crisis 17 2.3 Equity-market linkages 19 2.3.1 Overview of equity-market linkages 19 2.3.1.1 Co-integration 20 2.3.1.2 Causality 21 2.3.1.3 Contagion 21 2.3.2 Theory of equity-market linkages 22 2.3.2.1 Purchasing power parity 22 2.3.2.2 Modern portfolio theory 23 2.3.3 Sources of equity-market linkages 25 2.4 A review of equity-market linkages 27 2.4.1 Co-integration 27 2.4.2 Causality 29 2.4.3 Contagion 30 2.5 Impacts of financial crises on equity-market linkages 31 2.5.1 Co-integration 31 2.5.2 Causality 32 viii 2.5.3 Contagion 33 2.6 Chapter conclusion 34 Chapter 3: The Vietnamese Equity Market: Pre- and Post-Global Financial Crisis 35 3.1 Overview 35 3.2 Background to the Vietnamese equity market 36 3.2.1 History 36 3.2.2 Regulations 37 3.3 Market performance 40 3.3.1 Market development 40 3.3.2 Listing activity 42 3.4 Investor base in the market 44 3.4.1 Investor segmentation 44 3.4.2 Investor characteristics 46 3.5 Market environment influencing cross-market linkages 47 3.5.1 Fundamental factors 47 3.5.2 Market regulation 48 3.5.3 Market information 49 3.5.4 Investor behaviour 49 3.5.4.1 Herd behaviour 50 3.5.4.2 Day-of-the-week effect 51 3.6 Chapter conclusion 52 Chapter 4: Data Collection and Research Methodology 53 4.1 Overview 53 4.2 Data and sample 53 4.2.1 Data processing 55 4.2.2 Descriptive analysis 59 4.2.3 Unit root tests 67 4.2.3.1 Unit root tests without structural breaks 67 4.2.3.2 Unit root tests in the presence of structural breaks 70 4.3 Research methodology 72 4.3.1 Co-integration 72 4.3.1.1 Co-integration based on residuals 73 4.3.1.2 Co-integration in the presence of structural breaks 74 4.3.1.3 Co-integration based on the VAR model 74 4.3.2 Causal relationships among equity markets 76 4.3.2.1 Pair-wise Granger causality test 76 4.3.2.2 Multivariate Granger causality test based on the VAR model 77 4.3.2.3 VAR analysis 79 4.3.3 Contagion effects among the equity markets 80 4.3.3.1 Constant conditional correlation test 81 4.3.3.2 Dynamic conditional correlation test 82 4.4 Chapter conclusion 83 Chapter 5: Empirical Estimations with Models 84 5.1 Overview 84 5.2 Co-integration among equity-market levels 84 5.2.1 Bivariate co-integration based on residual tests 85 5.2.2 Bivariate co-integration with the presence of structural breaks 88 5.2.3 Co-integration based on the VAR model 93 ix .. .Impacts of the Global Financial Crisis on an Emerging Market: The Case of Vietnam Phuong Thao Tran A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of. .. commercial banks and financial institutions, and lead to a fundamental change in the relationships among both advanced and emerging markets An overview of the causes and consequences of the GFC is... studies have examined the impacts of the GFC on advanced and major emerging markets, rather than small young emerging markets In the era of global market integration, emerging markets have been attracting