Examining factors affecting stock market performance in vietnam

Examining íactors affecting stock market performance in Vietnam Abstract This paper tests whether innovations in macroeconomic variables are risks that are rewarded in the stock market Financial theory suggests that the following macroeconomic variables should systematically affect stock market retums: the spread between expected and unexpected inílation, GDP, FDI, exchange rate and money supply We find that these sources of data are signiíicantly iníluence on VN-Index Introduction In Vietnam, the change of macroeconomic policies often happens suddenly, thus affecting the psychology of investors, the stock market (stock market) and the general activities of the economy Thereíồre, analyzing the impact of macroeconomic factors on the economy in general and the stock market in particular is a necessary and useful thing When identiíying macroeconomic factors affecting the stock market, it will contribute to Solutions to overcome when there are negative impacts of macroeconomic factors on the stock market as well as help develop appropriate stock market with the economic situation This study aims to measure the impact of six macroeconomic factors including: inílation (represented by consumer price index), M2 money supply, VND / USD exchange rate, inílation, total trading volume, gross domestic product and íồreign direct investment to stock price indexes are being applied at Vietnam Stock Exchange (VN-Index) Research results show that in the long term exchange rate, íồreign direct investment and gross domestic have a negative impact on stock price indexes; With inílation, money supply and total trading volume have a positive impact on most stock price indexes in the long term At present, there are many articles and researches about the impact of macroeconomic factors on the stock market However, in each time and different conditions, the impact factors and the level of impact on the stock market will not be the same Especially in the current condition of Vietnam stock market with many companies was listed on stock market, the difference may be very large In order to achieve this goal, the next chapter will present the theoretical basis of the research problem ìer that, the research method and model test results Finally, comment on research results and conclusions Key words: Gross Domestic Product, Foreign Direct Investment, Exchange Rate CHAPTER 1: LITERATURE REVIEW In Vietnam, the change of macroeconomic policies often happens suddenly, thus affecting the psychology of investors, the stock market and the general activities of the economy Thereíồre, analyzing the impact of macroeconomic íactors on the economy in general and the stock market in particular is a necessary and useful thing When identifying macroeconomic íactors affecting the stock market, it will contribute to Solutions to overcome when there are negative impacts of macroeconomic íactors on the stock market as well as help develop appropriate stock market with the economic situation At present, there are many articles and researches about the impact of macroeconomic íactors on the stock market However, in each time and different conditions, the impact íactors and the level of impact on the stock market will not be the same Especially in the current condition of Vietnam stock market with the introduction of many new indexes in HOSE - Index such as VN30, VNMidcap, VN100, VNSmallcap, VNAllshare, the difference may be very large To achieve this goal, the next section will present the theoretical basis of the research problem After that, the research method and model test results Finally, comment on research results and conclusions Moreover, there are many reasons that affect Vietnam stock market and some the most well-known factors are GDP, CPI, FDI, Gold, and FDI From those, I found there are three important factors that have a strong iníluence on Vietnam's stock market that are Exchange rate, Inílation, Money Supply, GDP and FDI 1.1 Deíinitions 1.1.1 Vietnam Stock Market The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place Such Hnancial activities are conducted through institutionalized íồrmal exchanges marketplaces which operate under a deíined set of regulations There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities (Investopia, 2019) 1.1.2 Inílation ỉnílation is a quantitative measure of the rate at which the average price level of a basket of selected goods and Services in an economy increases over a period of time It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods Often expressed as a percentage, inílation indicates a decrease in the purchasing power of a nation’s currency (Investopia, 2019) 1.1.3 Money supply The money supply is the entire stock of currency and other liquid instruments circulating in a country's economy as of a particular time The money supply can include cash, coins, and balances held in checking and savings accounts, and other near money substitutes Economists analyze the money supply as a key variable to understanding the macroeconomy and guiding macroeconomic policy (Investopia, 2019) 1.1.4 FDI 1.1.5 Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country Generally, FDI takes place when an investor establishes íồreign business operations or acquires íồreign business assets, including establishing ownership or controlling interest in a íồreign company Foreign direct investments are distinguished from portíồlio investments in which an investor merely purchases equities of foreign-based companies (Investopia, 2019) 1.1.6 Exchange rate 1.1.7 An exchange rate is the value of one nation's currency versus the currency of another nation or economic zone For example, how many u.s dollars does it take to buy one euro? As of February 23, 2019, the exchange rate is 1.13, meaning it takes $1.13 to buy €1 (Investopia, 2019) 1.1.8 GDP 1.1.9 Gross Domestic Product (GDP) is a broad measurement of a nation’s overall economic activity GDP is the monetary value of all the íinished goods and Services produced within a country's borders in a speciíic time period 1.1.10.GDP includes all private and public consumption, govemment outlays, investments, additions to private inventories, paid-in construction costs and the íồreign balance of trade (exports are added, imports are subtracted) It may be contrasted with Gross National Product (GNP), which measures the overall production of an economy's citizens, including those living abroad, while domestic production by íồreigners is excluded Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well (in the United States, for example, the govemment releases an annualized GDP estimate for each quarter and also for an entire year) (Investopia, 2019) 1.2 Impact of different íactors on períồrmance of stock market 1.1.11 1.2.1 Inílation 1.1.12.The relationship between stock market períồrmance and inílation is imperative for investors because stocks are expected to provide protection from the effects of inílation (Mbulawa, 2015) However, A number of researches conducted to examine the effect of inílation on stock retums in both developed and developing economies around the world have provide mixed íindings on the connection between inílation and stock market retums For instance, Fama and Schwert (1977) found a negative relationship between the períồrmance of the stock market and inílation Some signiíicant studies from Pearce and Roley (1985) and Hardouvelis (1988) showed no signiíicant correlation between the stock retums and inílation and this proves that there is need for further exploration into the topic To seek clarity on the relationship between inílation and stock price movements, further research must be done to investigate the behavior of the two variables This study intends to address the question: what is the effect of inílation on stock market retums in the VSM? There are a wide range of researches showed that how inílation affects on stock market For example, in 1977, Fama and Schwert found a relationship between inílation and the stock market The author used expected inílation and expected inílation to consider the impact of inílation on the stock price index and the results show that there is a negative impact of inílation on stock prices Mohammed Omran and John Pointon (2001) also found negative impacts of inílation on the Egyptian stock market in the short and long term In 2011, Adel AI Sharkas and Marwan Alzoybi conducted research on the subject of Stock prices and inílation; Experimental evidence in countries such as Jordan, Saudi Arabia, Kuwait, Morocco With the VAR model, the author supported the hypothesis of the long-term impact of inílation and stock prices Mahedi (2013) based on market efficiency inílation iníluences stock indices, where; when the inílation rate is higher than expected, which is economically bad news, implies meaningful impact of stock retums 1.1.13.A study by Alimi (2014) also examined the long run and short run relationships between inílation and the Hnancial sector development in Nigeria over the period between 1970 and 2012 The Hndings of the study íồund that that inílation presented deleterious effects on Hnancial development over the study period TaoTik and Omosola (2013) explored the relationships and dynamic interactions between stock retums and inílation in Nigeria and revealed the existence of a long run relationship between stock retums and inílation Ahmad and Naseem (2011) examined the impact of high inílation on stock market retums in Pakistan using monthly data of inílation and stock retums and found that there is negative and signiíicant impact of inílation on stock retums Krylova & Vahamaa (2004) examined the impact of inílation and economic growth expectations and perceived stock market uncertainty and established that stock and bond prices move in the same dữection during periods of high inílation expectations, while epochs of negative stock-bond retum correlation seem to coincide with the lowest levels of inílation expectations In their study, Kullapomand Lalita (2010) also investigated the relationship between inílation and stock prices in Thailand andalso explored the impact of speciíic events and revealed that that movement of stock prices is irrelevant to inílation Kaul (1987) explains that the relationship between inílation and stock retums varies over the time in a systematic way He determines that this relationship is caused by money demand and supply factors Pérez de Gracia and Cunado (1999) analyze the relationship between inílation and common stock retums during the 1941-1999 in Spain, corroborating the existence of Granger causality relationship between inílation and stock retums and, thereíồre, they disagree with Geske, Roll, and Fama: this relationship cannot be spurious Other altemative explanation is the theoretical Rational Expectations Equilibrium Model of assets prices of Veronesi (1999) He concludes that stock prices overreact to bad news when the State of the economy is good and underreact to good news when the State of the economy is bad It occurs because when the announcements go against the market tendency, the investor’s uncertainty increases and, thereíồre, the volatility of the market also increase 1.1.14.On the other hand, a recent paper of Li et al (2010) suggests that the relationship between inílation and stock retums varies depending on the economy goes through high or low inílation periods Estep and Hanson (1980) propose that this relationship could be neutral because the companies can transíer the increases of inílation to the prices of their Products This theory is known as Flow - Through hypothesis (Jareno, 2005, and Jareno and Navarro, 2010) They conclude that the companies with a higher flow - through ability are less affected by changes in inílation rate Thereíồre, the negative effect of a rise in inílation on a firm is inversely related with its flow - through ability Díaz and Jareno (2009 and 2013) deal to explain the impact of inílation news on stock prices taking into account, on one hand, the Veronesi’s hypothesis and, on the other hand, the Estep and Hanson’s flow - through hypothesis Firstly, they analyze the short run response of each sector of Spanish economy to unanticipated component of inílation announcements, and secondly, they study the potential explanatory íactors of each response They observe different reactions to unexpected inílation depending on the direction of the news and the State of the economy They obtain evidence that the positive surprises ( bad news ) affect in more sectors than the negative surprises ( good news ) and, moreover, the reaction of investors is stronger when the news are bad than when the news are good (as suggested by Veronesi) Some authors such as Oxman (2012) suggest that the relationship between inílation rate and stock retums depends on the measure of inílation it has utilized He concludes that all measures of inílation are positively and signiíicantly related with risk premium but not with excess retums 1.1.15.In conclusỉon, most research found that ỉnflatỉon have a negatỉve ỉmpact on stock market The unexpected rỉse of ỉnflatỉon ỉs generally consỉdered the mostpaỉnful, as ỉt takes companies several quarters to be able to pass along higher ỉnput costs to consumers Lỉkewỉse, consumers feel the unexpectedprỉce when goods and Services cost more Therefore, consumers tend to ỉnvest less on stock market 1.2.2 Money supply 1.1.16.National stock markets, belonging to and being the basis of the global Capital market, affect the global market on one hand, but on the other hand they are themselves under the iníluence of the global market Some authors (Bilson, Brailsíồrd, Hooper, 2000) note that national (risk) íactors affect the períồrmance of the stock market more than global íactors (supranational) The basic instrument for investigating the íactors affecting stock markets is the íìmdamental analysis which can be períồrmed on three basic levels: global, sector-specitic and corporate Factors affecting the price behaviour not only of shares but also other securities and instruments can be further divided into macroeconomic and microeconomic (e.g psychological effects) As King (1966) notes, stock markets are iníluenced by macroeconomic íactors by an average of 50% A similar view is shared by Musílek (1997) who, unlike King, stays on the general level and claims that if an investor wants to be successful, he must focus mostly on price-shaping macroeconomic íactors In regard of that the spot price of stock present future income, which are discounted, Flannery, Protopapadakis (2002), mean that macroeconomic variables are the most important indicators, which iníluence the stock retums, because right this factors has an impact on future company's cash flow and iníluence the high of discount rate 1.1.17.The tirst study in modem history, which focus on effect of macroeconomic variables on stock prices can we post e.g Nelson (1976), Jaffe a Mandelker (1977) or Fama, Schwert (1977) The impact of national macro-economic íactors on the períồrmance of national stock market in the modem period was addressed by authors such as Bilson, Brailsíồrd and Hooper (2000), who maintain that these íactors determine the stock prices more than the global macroeconomic íactors According to Veselá (2010) the macroeconomic íactors that iníluence the development of stock prices, include interest rate, inílation, GDP, money supply, the movement of intemational Capital changes in exchange rates, political and economic shocks According to Kohout (2010), the most important factor iníluencing the development of stock prices in the 1.1.18 long term is the amount of money in the economy (i.e money supply) Also Flannery, Protopapadakis (2002) include among the major macroeconomic factors the money supply as well as unemployment, trade balance, the number of new residential buildings and the Producer Price Index 1.1.19.According to Maskay (2007) or Chromec (2006), the monetary policy or change in money supply, is one of the most effective tools available to the national Central banks of individual countries in association with iníluencing the actual economic activity Many authors, such as Keran (1971), Gupta (1974), Musílek (1997), Poiré (2000) or Shostack (2003) consider the money supply as the instrument of the monetary policy, to be the most important macroeconomic factor that iníluences the behavior and development of stock prices Maskay (2007) and loannidis, Kontonikas (2006) consider the stock market to be the basic indicator of the condition and development of the economy strongly iníluencing and preceding it Also these authors consider the money supply to be a strong determinant of the stock market, i.e of the entire economy Money supply can affect stock prices directly, when there is more money in the economy than can be utilized so they are allocated to investments But as already mentioned, for example, by using quantitative release results indirectly in the reduction of the interest rates rendering the extemal íinancing cheaper, leading to increasing investments (growth in the demand for shares) and consumption (better economic results of companies) 1.1.20.By examining global íactors certain associations were discovered between variables (in this case the money supply) and the development of stock prices, using which we can predict the future development and that represent an important guide for the investor Most authors listing macroeconomic íactors that iníluence the development of stock prices consider the monetary policy, or change of the money supply in the economy to be the most important factor A statement by Gupta (1974) serves as example, when he says that the money supply can be utilised for predicting the development of stock markets His investigation coníirmed that 59% of the value of 1.1.21 stock indices can be predicted based on the money supply This statement is supported by Rapach, Wohar and Rangvid (2005) who, in their analysis íồcused on the prediction of stock market development by using macroeconomic factors in 12 countries, concluded that the most trustworthy macroeconomic indicator for stock market predictions is the interest rate Pearce, Roley (1985) in their research dealt with the issues of anticipative money supply and concluded that there is a reciprocal relation between the nonanticipative money supply and the development of the stock prices As stated by these authors, the Central bank will quickly respond to this growth by raising the interest rates, resulting in the reduction of stock prices, because investors will seek less risky substitutes for their investment On the contrary, according to Bemanke (2003) the anticipative change in the money supply will have no effect on the development of prices of íinancial assets (i.e also including equity securities - shares) because the investors included it in their decisions (the asset prices were discounted) Only non-anticipative change in the money supply may iníluence the prices of securities Varying effects of anticipative and non-anticipative money supply on the development of stock prices are coníirmed by the Maskay (2007) 1.1.22.There were many studies published which dealt with the analysis of the iníluence of the money on the stock markets, albeit with differing results As stated by Habibullah, Baharumshah (1996), the íirst author to empirically deal with the relationship between the money supply and stock rates was Sprinkel (1964), who found a strong relationship between the change in the u.s money supply and stock prices in the observed period of 1918-1960 This study became the basis for the work of Mookerje (1987), Jeng, at al (1990), and Malliaris, Urrutia (1991) In this respect, a question arises whether this relationship holds even today, that is approximately 50 years after publication of this pioneering study , or how massive change of the money supply (e.g the consequences of quantitative release) during the recent íinancial crisis iníluenced the development of stock prices and how the change in the money supply affects the development of the stock price bubbles 1.1.548 companies will eam more proílt The better períồrmance will increase the s&p 500 1.1.549 score How us stocks have risen 97 2050 1.1.550 1.1.551 1.1.552 Schroders 2000 09/11/2016 09/12/2016 1.1.553 09/01/2017 s&p 09/02/2017 96 09/03/2017 — DXY 1.1.554 Source Schroders Bloomberg data as at 11/03/2017 iboiwing the Standard and Poors 500 and the us doi la r versus a basket of currencies For iníocmaton purposes only The matenai 15 not mtended (õ provide advnce of any kind Inhxmation herein IS be leved to be rekabte but Schroden does not warrant It5 completeness Of âccúracy PaM perlot mance r5 no< a gu«de (O luture perlormance and may n