CHAPTER 4: RESULTS AND DISCUSSIONS 4.1 Evolution of monetary policy and development of the Vietnam’s stock market
4.2 Research results on impact of monetary policy on share price in Vietnam stock market
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 6 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 9 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
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
-15 -10 -5 0 5 10 15 20
2 4 6 8 10 12 14 16 18 20 22 24
-15 -10 -5 0 5 10 15 20
2 4 6 8 10 12 14 16 18 20 22 24
(c) Due to output shock (d) Due to commodity price shock
-15 -10 -5 0 5 10 15 20
2 4 6 8 10 12 14 16 18 20 22 24
-15 -10 -5 0 5 10 15 20
2 4 6 8 10 12 14 16 18 20 22 24
Source: Extracted from Eviews 8.0 In addition, Figure 4.4c shows that stock prices do not react immediately when there is an output shock and only starts to rise after 3 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
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
-20 -10 0 10 20
2 4 6 8 10 12 14 16 18 20 22 24 -10
-5 0 5 10 15 20 25 30
2 4 6 8 10 12 14 16 18 20 22 24
(c) Response of IPI to IR shock (d) Response of IPI to M2 shock
-15 -10 -5 0 5 10 15
2 4 6 8 10 12 14 16 18 20 22 24 -15
-10 -5 0 5 10 15
2 4 6 8 10 12 14 16 18 20 22 24
Source: Extracted from Eviews 8 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
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 Variance decomposition of VNI
Period FFR OIL IPI CPI M2 IR VNI
1 0,070 3,572 2,802 1,387 0,135 0,177 91,857 3 0,728 8,293 1,578 1,651 1,130 2,254 84,366 6 4,741 9,598 1,655 1,953 2,656 3,075 76,322 9 4,936 10,581 1,886 2,090 2,808 6,686 71,013 12 5,171 10,485 2,058 2,430 3,361 6,709 69,786 24 7,250 10,261 2,439 2,385 3,571 6,701 67,393
Source: Extracted from Eviews 8 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 /
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 3 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 Variance decomposition of VNI
Period FFR OIL IPI CPI M2 IR VNI
1 3,150 2,937 3,712 2,435 0,273 4,735 82,757
3 2,744 4,558 7,369 7,453 8,823 8,439 60,615
6 3,254 8,751 5,895 6,031 7,217 16,577 52,275
9 4,115 11,025 5,822 6,706 6,819 16,227 49,286 12 4,111 10,972 6,085 6,841 7,126 16,060 48,805 24 4,153 10,892 6,038 6,916 7,966 15,921 48,114
Source: Extracted from Eviews 8 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 6 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.