The impact of macroeconomic indicators on stock prices in vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
-----------------------------------

HUYNH THANH DUNG

THE IMPACT OF
MACROECONOMIC INDICATORS
ON STOCK PRICES IN VIETNAM

MASTER OF BUSINESS (Honours)
SUPERVISOR: Dr. PHAM QUOC HUNG

Ho Chi Minh City – 2013


i
*

ACKNOWLEDGEMENTS

Firstly, I would like to express my very great appreciation to my supervisor
– Dr. Pham Quoc Hung – for his enthusiastic guidance, valuable and constructive
suggestions during the planning and development of this thesis.
I would also like to thank all of my lecturers at International School of
Business (ISB) – University of Economics Ho Chi Minh City (UEH) – for
sharing their knowledge and experience during my master course. Enthusiastic
assistance provided by the ISB’s executive board and staffs was also greatly
appreciated.
I am grateful to all my friends and classmates form MBus 2 – ISB for their
support.

Finally, I would like to express my special thanks to my wife for her
support and encouragement throughout my study.


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ABSTRACT

This study investigates the impact of macroeconomic indicators on
Vietnamese stock prices using monthly data spanning from January 2008 to May
2013. Macroeconomic variables used in this study are industrial production index,
lending interest rate, consumer price index (as a proxy for inflation), and exchange
rate. The study employs the unit root test, cointegraion test developed by Johansen
and Jesulius (1990) and Vector Error Correction Model (VECM) in order to
examine the relationship between macroeconomic indicators and stock prices. The
empirical results reveal that there is a cointegrated relationship between the stock
price and four selected macroeconomic variables in Vietnam, indicating the
presence of long run equilibrium relationship. In the long run, the industrial
production and interest rate have significant positive effect on stock prices. In
contrast, consumer price index has significant negative impact on stock prices. In
the short run, stock prices are only affected by itself and the interest rate at onemonth lag. The industrial production index and consumer price index have no
effect on stock prices. Furthermore, the findings show that the exchange rate does
not influence stock prices in the short run as well as in the long run.
Keywords: Stock price, macroeconomic variables, cointegation, VECM


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TABLE OF CONTENT

ACKNOWLEDGEMENTS.................................................................................... i

ABSTRACT ........................................................................................................ ii
TABLE OF CONTENT .................................................................................... iii
LIST OF FIGURES ........................................................................................... vi
LIST OF TABLES ............................................................................................ vii
LIST OF ABBREVIATIONS ........................................................................... ix
CHAPTER 1: INTRODUCTION .................................................................. 1
1.1 Research background ................................................................................... 1
1.2 Research problems ....................................................................................... 4
1.3 Research objectives ...................................................................................... 5
1.4 Significance of the research .......................................................................... 5
1.6 Research methodology and scope ................................................................. 6
1.7 Research structure ........................................................................................ 7

CHAPTER 2: LITERATURE REVIEW ...................................................... 9
2.1 Theoretical framework ................................................................................. 9
2.1.1 The top-down approach.......................................................................... 9
2.1.2 The dividend valuation model .............................................................. 10
2.2 Relationship between industrial production and stock price ........................ 11
2.3 Relationship between interest rate and stock price ...................................... 13


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2.4 Relationship between inflation and stock price ........................................... 17
2.5 Relationship between exchange rate and stock price................................... 20
2.6 Hypotheses summary ................................................................................. 23
2.7 Research model .......................................................................................... 24

CHAPTER 3: RESEARCH METHODOLOGY ....................................... 25

3.1 Research process ........................................................................................ 25
3.2 Measurement of variables .......................................................................... 26
3.2.1 Dependent variable .............................................................................. 26
3.2.2 Independent variables .......................................................................... 26
3.3 Data collection and sample size .................................................................. 27
3.4 Model specification .................................................................................... 28
3.5 Method of data analysis.............................................................................. 28
3.5.1 Unit root test ........................................................................................ 29
3.5.2 The order of integration ....................................................................... 31
3.5.3 Cointegration concept .......................................................................... 31
3.5.4 Cointegration test ................................................................................. 32
3.5.5 Vector Error Correction Model ............................................................ 33

CHAPTER 4: DATA ANALYSIS AND RESULTS .................................. 35
4.1 Descriptive statistics................................................................................... 35
4.2 Correlation analysis.................................................................................... 37
4.3 Unit root test .............................................................................................. 38


v
4.4 Cointegration test ....................................................................................... 39
4.4.1 Optimal lag length selection ................................................................. 39
4.4.2 Cointegration test ................................................................................. 40
4.5 Hypotheses testing ..................................................................................... 42
4.5.1 The long run relationship ..................................................................... 43
4.5.2 The short run relationship .................................................................... 46
4.6 Diagnostic tests .......................................................................................... 51
4.6.1 Autocorrelation test .............................................................................. 51
4.6.2 Normality test ...................................................................................... 52
4.6.3 Heteroskedasticity test ........................................................................ 53

CHAPTER 5: CONCLUSIONS AND IMPLICATIONS ......................... 54
5.1 Conclusions................................................................................................ 54
5.2 Implications ............................................................................................... 56
5.3 Limitations and further research ................................................................. 57

REFERENCES .................................................................................................. 59
APPENDICES................................................................................................... 62


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LIST OF FIGURES

Figure 1.1. VN-Index from January 2001 to May 2013 .................................. 3
Figure 2.1. VN-Index and Industrial Production Index ................................. 13
Figure 2.2. VN-Index and Interest Rate ........................................................ 17
Figure 2.3. VN-Index and CPI ..................................................................... 20
Figure 2.4. VN-Index and Exchange Rate .................................................... 23
Figure 2.5. Conceptual model ...................................................................... 24
Figure 3.1. Research process ........................................................................ 25


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LIST OF TABLES

Table 3.1. Description of variables ..................................................................... 27
Table 4.1. Descriptive information ..................................................................... 35
Table 4.2. Correlation matrix ............................................................................. 37

Table 4.3. Result of unit root test at levels .......................................................... 38
Table 4.4. Result of unit root test after first differencing .................................... 38
Table 4.5. VAR lag order selection criteria ........................................................ 40
Table 4.6. Result of cointegration test ................................................................ 41
Table 4.7. Result of cointegrating vector ............................................................ 43
Table 4.8. Result of long run relationship ........................................................... 44
Table 4.9. Result of short run relationship .......................................................... 47
Table 4.10. Hypotheses testing summary ........................................................... 50
Table 4.11. Result of autocorrelation.................................................................. 51
Table 4.12. Result of normality test .................................................................... 52
Table 4.13. Result of heteroskedasticity ............................................................. 53
Table A1. Correlation Matrix ............................................................................. 62
Table A2. Result of ADF test for LVN ............................................................... 63
Table A3. Result of ADF test for D(LVN) ......................................................... 63
Table A4. Result of ADF test for LIP ................................................................. 64
Table A5. Result of ADF test for D(LIP) ........................................................... 65
Table A6. Result of ADF test for LIR ................................................................ 66


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Table A7. Result of ADF test for D(LIR) ........................................................... 67
Table A8. Result of ADF test for LCPI .............................................................. 67
Table A9. Result of ADF test for D(LCPI) ......................................................... 68
Table A10. Result of ADF test for LEXR .......................................................... 69
Table A11. Result of ADF test for D(LEXR) ..................................................... 70
Table A12. Result of optimal lag length selection .............................................. 71
Table A13. Result of cointegration test .............................................................. 71
Table A14. Result of VECM .............................................................................. 75
Table A15. Result of coefficients of ECM.......................................................... 76
Table A16. Serial correlation LM test ................................................................ 77

Table A17. Correlogram Q-statistics .................................................................. 79
Table A18. Heteroskedasticity test ..................................................................... 80


ix

LIST OF ABBREVIATIONS

ADF

Augmented Dickey Fuller

CAPM

Capital Asset Pricing Model

CPI

Consumer Price Index

DVM

Dividend Valuation Model

ECM

Error Correction Mechanism

ECT

Error Correction Term

EViews

Econometric Views

EXR

Exchange Rate

GDP

Gross Domestic Product

GNP

Gross National Product

GSO

General Statistic Office

HNX-Index

Hanoi Stock Price Index

HNX

Hanoi Stock Exchange

HOSE

Ho Chi Minh Stock Exchange

IFS

International Financial Statistics

IMF

International Monetary Fund

IPI

Industrial Production Index

IPO

Initial Public Offering

IR

Interest Rate

OLS

Ordinary Least Squared

SPSS

Statistical Package for the Social Sciences


x
VAR

Vector Autoregressive

VECM

Vector Error Correction Model

VNI

VN-Index

VN-Index

Vietnamese Stock Price Index


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CHAPTER 1: INTRODUCTION

This chapter introduces the background of the stock market including the
Vietnamese stock market. Next, the research problems and research objectives are
identified. Furthermore, the significance and scope of the research are also
presented. Finally, the research structure gives an overview of the structure
organized in this study.

1.1 Research background
It is undeniable the importance of the stock market in the financial system
of any economy. In both developed and developing countries, it becomes a
significant component of a country’s financial system and plays very important
roles in the economy. One of the major roles that the stock market plays is to
mobilize the savings. By mobilizing of savings, stock markets help to bridge the
gap between savers and investors in an economy. Stock markets provide services
and benefits to governments, enterprises, and investors. In fact, governments
themselves can issue bonds on the stock market to raise money for infrastructure,
or other major projects. As regards the corporations, they are able to make an
initial public offering (IPO) on the stock exchange to mobilize new capital for their
business. Moreover, the stock market is also a place where investors can diversify
their portfolio in order to reduce the risks by investing in different stocks. Stock
price, therefore, becomes a matter of general concern of people including


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government, enterprises, and investors. The question of which factors that affects
the stock prices is of serious concern to the investors all over the world.
In economic theory, the price is mostly affected by supply and demand
relationship. This principle is also true for the stock price. If the demand for a
share is greater than its supply, there will be an increase in share price. Conversely,
the share price will fall if the supply for a share is higher than the demand. Beyond
the basic microeconomic factors such as supply and demand, the relationship
between stock prices and macroeconomic variables such as industrial production,
interest rates, inflation rates, exchange rate has been the subject of various studies
in the field of economy and finance in the last decades. A number of studies
carried out in developed market like U.S (Chen, Roll & Ross, 1986) and Japan
(Mukherjee & Naka, 1995) reveal that the macroeconomic factors have an impact

on stock prices. These studies have paved the way for further examination of
similar relations in emerging markets such as Singapore, Thailand, Malaysia,
Indonesia and Philippines (Wongbangpo & Sharma, 2002), Vietnam (Hussainey &
Ngoc, 2009), and Jordan (El-Nader & Alraimony, 2012).
The Vietnamese stock market, which comprises of the Ho Chi Minh Stock
Exchange (HOSE) and Hanoi Stock Exchange (HNX), is one of the emerging
markets in Asia. The HOSE and HNX were established in July 2000 and March
2005, respectively and they have made significant contributions to the economy.
Like other emerging markets in Asia, the Vietnamese stock market is attracting
attention as a market that can bring good returns for investors. As the figure 1.1


3
shows, after a period of rapid growth in stock prices from the beginning to the end
of 2007, however, there was a significant decline in Vietnamese stock prices from
the end of 2007 onwards. The year of 2007 is the year that the Vietnamese stock
market was in a stock market bubble. The stock price index reached a peak at
1170.7 points in March 2007. There are many factors leading to the fluctuations in
Vietnamese stock price, such as international and domestic economic uncertainty,
psychology of investors. Despite the fact that the Vietnamese stock market is
potential for investors, there is limited empirical study investigating the
relationship

between

stock

prices

and

economic

indicators,

especially

macroeconomic indicators (Hussainey & Ngoc, 2009). Therefore, the question of
whether or not the macroeconomic indicators affect Vietnamese stock prices is
also concerned.

VN-INDEX
1,200
1,000
800
600
400
200
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Figure 1.1. VN-Index from January 2001 to May 2013
Source: Ho Chi Minh Stock Exchange (HOSE)


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1.2 Research problems
Many researchers investigate the impact of macroeconomic variables on
stock prices and offer evidence that macroeconomic variables affect stock prices
such as Chen, et al. (1986) for US; Mukherjee and Naka (1995) for Japan;
Wongbangpo and Sharma (2002) for five Asian countries namely, Singapore,

Thailand, Malaysia, Indonesia and Philippines;

and

(2005) for

Turkey; and El-Nader and Alraimony (2012) for Jordan. However, the findings of
these researches are quite different or even opposite in different countries. For
instance, Wongbangpo and Sharma (2002) determine a negative relation between
interest rate and stock price in Singapore, Thailand and Philippines, but a positive
relation is found in Indonesia and Malaysia.
Furthermore, there exits limited study regarding the examination of how
macroeconomic indicators influence stock prices in emerging markets, especially
in Vietnam (Hussainey & Ngoc, 2009). Hussainey and Ngoc also state that their
study is the first study that investigates the effects of macroeconomic indicators on
Vietnamese stock prices. They believe that their paper provides a significant
contribution to the existing literature, as the authors are the first to examine this
issue in Vietnam. Nevertheless, the limitation of their study is that this study only
examines the impact of two domestic macroeconomic indicators (namely interest
rate and industrial production), and international factors (US macroeconomic
indicators) on stock prices. Their recommendation is that other macroeconomic
variables should be included in the model in order to make the results become
more valid.


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1.3 Research objectives
The main aim of this study is to examine the impact of four key
macroeconomic indicators, namely industrial production index, interest rates,
inflation rates, and exchange rates on Vietnamese stock prices. More specifically,

the purpose of this study is to answer the following questions:
● Do the long run and short run relationship between selected
macroeconomic indicators and Vietnamese stock prices exist?
● How do macroeconomic indicators affect the stock price in long run and
short run?

1.4 Significance of the research
Since the Vietnamese stock market is still immature, it is necessary to have
more and more researches into the Vietnamese stock market so that people can
understand more about the stock market and help develop the stock market in a
sustainable way. By examining the relationship between macroeconomic
indicators and stock price, the findings of this paper are expected to offer
implications that can help the policy makers, managers of listed companies and
investors to predict how the stock price changes if macroeconomic indicators
fluctuate.
More specifically, based on the results of this study, policy makers can
evaluate the impact of their policies, such as fiscal policy, monetary policy on
stock market. Therefore, they can formulate better policies that efficiently and
timely adjust the Vietnamese stock market.


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Apart from helping policy makers, the results of this study can help
managers of listed companies to understand the impact of external factors on the
stock prices of the company and thereby keeping the stock prices steady.
Moreover, the findings drawn from this study can help the investors
understand more about the volatility of the stock market as a measure of risk.
Therefore, they can make the right decision in order to avoid risks and make more
profits based on their understanding of macroeconomic information. For instance,
if the finding shows that an increase in inflation rate reduces the stock price, the

investors should adjust their portfolios by selling the stock and moving to other
assets that are more profitable.
1.6 Research methodology and scope
This study confines itself in investigation of the relationship between stock
prices in Ho Chi Minh Stock Exchange (VN-Index) and four selected
macroeconomic variables, namely industrial production, interest rate, inflation rate
and exchange rate. The relationship between HNX - Index and these
macroeconomic variables is beyond the scope of this study. In addition, this study
only uses 65 monthly observations from January 2008 to May 2013 for data
analysis. The analysis includes the following steps:
● Descriptive statistics analysis
● Using ADF test to test the stationary of all time series data
● Using cointegration test to check whether there exists a long run
relationship among variables or not.


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● Applying Vector Error Correction Model to investigate the long run as
well as the short run relationship if there is a cointegration relationship among
variables .
Eviews software version 6.0, SPSS version 16.0 software and Microsoft
Excel software are used as data analysis tools.

1.7 Research structure
This research is divided into different chapters and each chapter covers
some areas of the research. The structure of the research is as follows:
Chapter 1: Introduction: This chapter depicts general information about the
research including research background, research problems, research
objectives, significance and limitations of the research.
Chapter 2: Literature review: The relevant literature on the research is reviewed in

this chapter, including financial theories and previous empirical studies
regarding the relationship between macroeconomic factors and stock
prices. In addition, the hypotheses, which are tested in this research, are
also set.
Chapter 3: Research methodology: This chapter discusses about the research
process, measurement of variables, data collection and methods of data
analysis employed in this study.
Chapter 4: Data analysis and results: Collected data are analyzed in this part in
order to investigate the relationship between macroeconomic variables


8
and stock price. In addition, the results obtained from empirical
research are also analyzed.
Chapter 5: Conclusions and implications: This chapter is all about conclusions of
this study, implications, limitations, and recommendations for further
studies relating to the research topic.


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CHAPTER 2: LITERATURE REVIEW

This chapter reviews relevant theories as well as the findings of previous
empirical studies regarding the relationship between selected four macroeconomics
and stock prices. Based upon these studies, hypotheses and conceptual model are
proposed.

2.1 Theoretical framework
There are many theories that mention the relationship between

macroeconomic variables and stock prices. This study bases on two of them,
namely the top-down approach and dividend valuation model or present value
model in order to explain that relationship.
2.1.1 The top-down approach
In the valuation process, top-down approach, which is a process of
gathering and organizing information about economic, industry and company, is
used to determine the intrinsic value of an ordinary share (Gitman, Joehnk, Juchau,
Wheldon and Wright, 2004). This approach includes three steps: economic
analysis, industry analysis and company analysis. The top-down approach believes
that both economy and industry have a significant impact on the company and its
stock price. Therefore, some macroeconomic variables should be taken into
account in the share valuation process. In other words, there exists a relationship
between macroeconomic factors and stock prices.


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2.1.2 The dividend valuation model
According to Gitman, et al. (2004), the intrinsic value of any investment
equals the present value of the expected cash flows. For a share, the intrinsic value
is the sum of the cash dividend received each year and the future price of the share.
Another way to view the cash flow benefits of a share is to assume that the
dividends will be received over an infinite time. From this perspective, the value of
share is equal to the present value of all the future dividends expected to provide
over an infinite time. This approach, which believes that the value of a share is a
function of its future dividends, is known as the dividend valuation model (DVM).
The DVM can be expressed as the following equation:

Where:
P is the value of the share.
Dt is the dividend received at year t.

r is the required rate of return.
As the equation 2.1 shows, the value of a share is equal to the present of all
future dividends or the expected cash benefits. Therefore, any economic factor that
affects either the expected future cash flow (Dt) or required rate of return (r) in
turn influences the value of the share.


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2.2 Relationship between industrial production and stock price
Industrial production is commonly used as a proxy for the real economic
activity. When compared to previous year’s figure, it depicts how fast the economy
is growing or contracting. In theory, industrial production increases during
economic expansion and decreases during a recession. A change in industrial
production, therefore, would signal a change in the economy. The productive
capacity of an economy rises during economic growth, which contributes to the
ability of corporations to generate more cash flows. As mentioned above, since
stock price is a function of future cash flows, changes in future cash flows will
lead to changes in the prices of shares. In short, any significant change in
economic growth, even up or down, can affect the stock price through investor’s
investment decision making. For instance, if investors believe that the economy is
growing and companies are making more profits along with economic growth,
they will be willing to pay more for buying stocks, leading to an increase in the
stock prices. Conversely, if there is a decline in economic growth, they will be
willing to sell the stocks or pay less for buying them, resulting in a fall in stock
prices.
Moreover, Wongbangpo and Sharma (2002) claim that a growth in output
increases expected future cash inflows and profitability of enterprises that create a
higher future dividend. With the expectation of higher dividend, investors are
always willing to buy shares at a higher price. As a consequence, the share price
will go up. In contrast, the opposite outcome is likely to occur in a recession. It

means that the share price will fall when there is a decline in output because this


12
lowers the profitability of the company. To sum up, theory suggests that there
exists a positive association between stock price and industrial production.
Many empirical studies use the industrial production index as a proxy for
economic activity. The growth of production may be consistent with the average
growth of the company’s sales and its cash flows. Therefore, industrial production
index should be useful in the asset pricing model (Chen, et al., 1986). Furthermore,
several empirical studies in emerging markets show the positive relationship
between real economic activity and stock price. In the most recently published
research, El-Nader and Alraimony (2012) examine the relationship between
Amman stock market return and Jordanian macroeconomic factors. They use real
gross domestic product (GDP) as a representative for real economic activity and
point out that GDP has a positive effect on Amman stock price in Jordan.
An additional study in a group of five Asian countries carried out by
Wongbangpo and Sharma (2002) shows the similar result. They point out that
stock prices in all five Asian countries, namely Indonesia, Malaysia, Philippines,
Singapore, and Thailand are positively related to growth in output, which is
represented by gross national product (GNP).
Furthermore,

and

(2005) investigate the relationship

between industrial production and stock prices in Istanbul stock exchange in
Turkey between 1991 and 2000. They explore that industrial production has a
positive impact on stock return, excluding the period which begins the 1994

financial crisis and ends with the beginning of the 1997 Asian crisis.


13
In the case of Vietnam, Hussiney and Ngoc (2009) examine the relationship
between industrial production and stock prices in Vietnam from 2001 to 2008.
They find out that industrial production has a positive effect on Vietnamese stock
prices. Their finding is consistent with theoretical expectations as well the results
of previous studies.
Based upon the theories and empirical findings drawn from previous
studies, the following hypothesis is set:
H1. Industrial production has a positive impact on the stock price in Vietnam.

900

140

750

120
100

600

80

450

60

300

40

150

20

0

0
2008

2009

2010

2011

VN-INDEX

2012

2013

IP

Figure 2.1. VN-Index and Industrial Production Index
Source: HOSE and GSO

2.3 Relationship between interest rate and stock price
According to the process of stock valuation, a discount rate, which is
perceived by investors as a required rate of return, is first determined. A chosen
discount rate depends on two components namely the time value of money and the
riskiness of the stock. The time value of money is represented by the risk free rate,


14
while the risk premium represents compensation for the riskiness of the stock. One
of the common methods utilized to determine the required rate of return is the
capital asset pricing model (CAPM).

Where:
Ri: the required rate of return on investment i.
Rf : the risk-free rate of return, the return that can be earned on a risk-free
investment.
βi: beta coefficient, or index of non-diversifiable risk, for investment i.
Rm: the market return; the average return on all securities.
Since interest rate is often used as a proxy for the risk free rate, if interest
rate changes, the risk free rate will change as well. In fact, changes in interest rates
are expected to affect the discount rate in the same direction through their effect on
the risk free rates (Mukherjee & Naka, 1995). As the equation 2.2 shows, an
increase in risk free rate will lead the required rate of return to go up. Based on the
dividend valuation model (DVM) mentioned in the beginning of this chapter, if
nothing else changes, there will be a decline in share prices due to the higher
required rate of return. Conversely, if interest rates fall and everything else remains
constant, the share price will rise because of the lower required rate of return.