Credit growth, macroeconomic factors and stock performance the case of hose 2002 2010

•

UNIVERSITY OF ECONOMICS

INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY

THE HAGUE

VIETNAM

THE NETHERLANDS

VIETNAM- NETHERLANDS
PROGRAM FOR M.A IN DEVELOPMENT ECONOMICS

~ ~~~

CREDIT GROWTH, MACROECONOMIC
FACTORS AND STOCK PERFORMANCE:
THE CASE OF HOSE 2002-2010

A thesis submitted in partial fulfillment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS
By

NGUYEN THI NGOC HAN

Academic supervisors

Dr. PRAM HOANG VAN
Dr. NGUYEN TRONG HOAI

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HO CHI MINH CITY, MARCH 2011

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TABLE OF CONTENT
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ABSTRACT

The paper analyzes the dynamic interactions among credit growth, some fundamental macroeconomic factors (exchange rate, inflation, industrial production, interest rate, gold price) and the
performance of Vietnam Ho Chi Minh Stock Exchange using time series econometrics of
cointegration and causality tests. In the analysis, we explore further with VAR-based variance
decomposition and impulse response functions to capture the direct and indirect effects of
innovations in one variable and other ones in the same model. The interesting results come out
with negative reaction of stock price to credit growth in first 11 months of study period before
any reverse trend occurs. And then it will still remain the sign in longer term. However, it seems
no significant evidence to prove the positive short-run impact of credit rate on stock price
increase. So Interest subsidy policy after global crisis (2008) is not the major reason to rescue
equity market. In addition, the variation of key variables including interest rate, inflation and
exchange rate has significant impacts on stock volatility in long run. One important policy
implication is that authorities should be cautious in implementing monetary policies exposed to
inflation risk as it has a consistent adverse influence on stock change in both short and long term.

Keywords: Credit growth, Macro-economics, Stock performance and
Impulse Response Function.

3


CHAPTER 1: INTRODUCTION
1.1 Research context:

Ho Chi Minh Stock Exchange (HOSE), formerly HOSTC, is the older of the two stock
exchanges in Vietnam. Established on 20 July of 2000, it started operation on 28 July in the same
year. The trading system of all stocks listed in HOSE is under the control of State Securities
Commission (SSC). HOSE runs as a state-owned one member limited liability company with

one-billion VND of chartered capital. At the very beginning, there were only two listed firms,
namely REE and SACOM traded two days per week. From 1 March 2002, market traded daily
with two order-matching sessions. Till 31 December 2007, 138 stocks were listed and traded five
days per week through a fully-computerized trading system, Automatic Order-Matching and PutThrough Trading system. In general, the total capitalization in HOSE accounts for over 40%
GOP. During operating time, Vn-Index had a sharp fluctuation peak to 1137 in February of2007
and then turned down sharply, which shocked almost investors and policy authorities. According
to some former studies, the root cause is originated from market participant's over-expectation
on booming price.
Despite HOSE's certain achievements over year, it is still fragile due to its own high risk,
big price volatility and poor trading system. As one of Asian emerging markets, HOSE has
experienced ups and downs because of the significant influences from external and internal
factors. In reality, many controversial problems signal the market inefficiency and instability in
terms of information asymmetry, a weak legal framework, the lack of transparency in financial
reporting, too much Government intervention in trading transactions and herding investor
4


behaviors. Indeed, these weaknesses are the challenges of Vietnam economy towards financial
liberalization process. Thus, HOSE in particular or Vietnam stock exchange in general hopefully
will develop into a strongly efficient capital-raising channel in the near future.
In the development period, the required tasks for policy makers from now on is to do
more qualified researches on Vietnam stock market and prevailing problems for timely
adjustment. Observing the economic changes since 2002, the rapid domestic credit has grown by
nearly 10 times, from about 2 hundred thousand up to more than 2 million billion dong.
Simultaneously, stock market boomed aggressively in 2007 when VN Index created history
(Figure 1.1). And the question whether these two factors have any links has raised the interest in

further estimation. Then its empirical result below can explain the relationship between domestic
credit growth and stock volatility, especially in the period right after the peak in 2007 until the
broadening monetary policy in 2009.

Figure 1.1: VN-Index & Credit aggregate in 2002Ml-2010M3

5


VNINDEX

1,000

800

600

400

200

2002

2003

2004

2005

2006

2007

2008

2009

DOMESTIC CREDIT

2,000,000

1,600,000

1,200,000

800,000

400,000

2002

2003

2004

2005

2006

Sources: IMF (20 10)
6

2007

2008

2009


Let's discuss more about Vietnam economic background and why credit growth
accelerated the period prior to 2008. A relevant update from World Bank (2007) gave some
explanation related to the so-called "Impossible trinity" of simultaneously maintaining nearly
fixed foreign exchange, independent monetary policy and an open capital account. Under this
implementation, the incident following increasing capital inflows was foreign exchange
depreciation or domestic currency appreciation that kept appealing more investors. The economy
was put in a challenge of excess liquidity. Due to its negative impact on Vietnam
competitiveness of export and growth slow-down, the Government intervened by purchasing
foreign exchange and selling securities. Then it moved foreign exchange market much flexibly.
However, the foreign reserve accumulation and VND appreciation forced SBV to choose
monetary and credit expansion in term of sterilization. This also hid potential exposure to
inflation and then unpredictable capital outflows, most seriously a crisis (2008) when the stock
value returned its real value. So it raises the interest in finding the real impact of credit growth on
stock performance scientifically over the period which will be presented in the following parts.
1.2 The scientific challenge:

The research will discover whether credit shocks have significantly affected HOSE
performance. Particularly, the credit growth under interest support program in 2009 aimed at
economic stimulation after global crisis in 2008. And thesis also generalizes how lagged length
between credit growth and stock price reaction would be. Further estimation will uncover which
of key macroeconomic and trend variables has remarkably influenced on stock price in both
short and long run since 2002. Based on the empirical result, stock investors, academic
!

economists and authorities can refer to the findings for their own decision-making. However,

7


some existing limitation of data and quantitative tools to interpret it in economic meaning are
necessary for further research then.
1.3 Goal and objectives of the research:

The overall goal of the project is to provide scientific results as trustworthy references for
stock investors. And then it gives some appropriate policy recommendations related to credit
applicable for the development of Ho Chi Minh Stock Exchange and Vietnam economy as a
whole.
To meet the goal, the first specific objective of the research is to identify the
cointegration and causality of domestic credit growth to HOSE's performance. Next is to analyze
the lag length between the prominent change in some monetary policies and its impact on stock
price market over 2002-20 I 0. Especially and specifically, how Decision 131-2009-QD-TTg on
Interest Rate Support for Organizations to expand their Production and Business affected stock
price will be discussed in the paper. By application of VAR and monetary transmission
mechanism (MTM), the research functions forecasting the stock volatility.
The second objective is to explain more about interactions among credit growth, other
key macroeconomic indicators and HOSE index. The testing will identify how significant and
which relationships, negative or positive, each independent macro-variables impact on the
dependent stock price.
The last is to gtve some recommendation for both stock exchange managers and
government policy makers.

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1.4 Research Questions:

In order to achieve the above objectives, let's try to answer the following questions:
1. Is there any relationship between credit growth rate and stock price index in long-

term as well as short-term?
2. Among potential substitute investment channels via foreign exchange, gold, money
and overseas stock markets, does domestic interest rate have the immediate effect on
the stock price variation?
3. Associated with credit, are all selective macroeconomic factors necessary for
forecasting HOSE price change in the long-run? If yes, what is the sign of individual
relationship between stock price and the others?
1.5 Structure of the thesis:

The thesis will follow introduction section with four other chapters. Chapter 2 reviews
the applicable theories of stock price determination as well as empirical studies about the
relationship between security index and macro-economic indicators. Chapter 3 describes
research methodology including data collection, variables of interest, econometric model
together with empirical procedures. Chapter 4 analyses the research results according to methods
recommended previously. It answers the thesis hypotheses whether the causality of Credit
growth to stock price change exists, which market the main substitute for stock investment
channel is and whether other macro-variables have significant impacts on stock variations. And
chapter 5 closes the study with a conclusion, policy implication and opens with its limitation for
further studies.
9


CHAPTER 2: LITERATURE REVIEW FOR STOCK'S RELATIONS WITH MACRO-

ECONOMIC FACTORS

This section will provide general concepts and previous valued researches based on
which the study can construct. It includes four main parts: key concepts, theoretical review,
empirical review and conceptual framework.
2.1 Key concepts:
2.1.1 Credit channel

Credit channel as suggested by Mishkin (1995) operates through two components - the
balance sheet channel and the bank lending one. The concept explains that increasing money
supply increases total credit that banks can supply to country economy. And then through the
bank financing channel, it will in tum boost aggregate demand and output, eventually push up
stock price. In line with the balance sheet channel, Bemanke and Gertler (1995) concerned the
external finance premium, which they defined as the bridge between the externally-raised cost of
funds and the opportunity cost of internal funds. Yet, this seems not significant in the case of
Vietnam because most credit has recently been granted to big state-owned enterprises regardless
ofthe consideration of their financial position. Briefly, domestic credit growth via banking loans
is the channel the State Bank uses to inject liquidity to the whole market.
2.1.2 Macro-economics

Macroeconomics is the study of the performance, structure and behavior of the entire
economy as a whole. It is different from microeconomics which focuses more on individuals and

10


how they make economic decisions. Actually, macro-economy is so complicated because there
are many factors influence on it. We usually analyze macro-economy by primarily looking at
national output (GDP), unemployment and inflation. Besides, there are consumption, interest
rate, foreign exchange, international trade and international finance which are modeled to explain
economic relationships. The study herein will employ some of the mentioned indicators to see
how they affect stock market.

2.1.3 Stock performance

Stock performance is a measure of the returns on shares over a period of time. There are
several measures of stock performance and each includes its own characteristics and benefits
during an analysis of returns. In order to understand stock performance of HOSE in Vietnam, the
thesis will employ stock index (VN-Index) as its proxy.
2.2 Theoretical literature:
2.2.1 Arbitrage Pricing Theory (APT)

This research is drawn from Arbitrage Pricing Theory (APT). Developed by Stephen
Ross (1976), the theory asserts that an asset's expected return is a linear function of
unanticipated change in a small number of macroeconomic factors. The sensitivity of the asset's
return to the individual elements is determined empirically by way of statistical technique. The
APT does not identify the specific factors that would affect asset returns. Yet four factors are
frequently evaluated in most application of the APT: (1) inflation, (2) industrial production, (3)
risk premium and (4) the term structure of interest rate. Different from Capital Asset Pricing
Model's risk measure by asset "beta" against market index, the four forces are primary

11


influences on stock market. Based on the traditional discounted cash flow valuation, the
unanticipated variations of inflation rate and industrial production are related to the real value of
future cash flow. The other two variables seem intuitively to be more linked to the risk-adjusted
discount rate. Risk premium measures investor attitudes toward risk perception about general
level of economic uncertainty while the term structure of interest rate influences on discount rate
for multiply year cash flows. However, the study did not show the evidence to deny the rest of
unsystematic variables affecting asset returns.
2.2.2 Discounted Cash Flow (DCF)

These four above factors find based on a common financial theory, namely, Discounted
Cash Flow valuation (DCF) which was identified by Chen Ross & Roll (1986). It is one of the

foundations to estimate the true value of common stock investment. Since the study aims to
identify key determinants of stock's true value rather fundamental analysis, Dividend Discount
Model (DDM) is suitable for review in this section. The model assumes that the time money

value of common stock is the present value of all future dividends. In the following equation
[2.1 ], interest rate and inflation affect discount rate and future cash flows while industrial
production reflects the health of business performance via dividend payment to shareholders.

Where

Vj: Value of common stockj
Dt: Dividend accrued from period t
Ke: Cost of Equity

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Assume that the dividend growth rate holds constant (g%), the time value of stock is written in
form ofthe following function.
.

DI

Vj = - - [2.2]
ke-g

Where

D 1 : Dividend in period 1

ke: Cost ofEquity
g : Constant growth rate
Based on the above function, there are 2 fundamental determinants, cost of equity and expected
growth rate, to examine the intrinsic value of a stock. They are independent to each other
pursuant to Keilly and Brown ( 1997). Growth rate depends on retention rate (b) and return on
equity investment (ROE) via the function: g = b

* ROE while ke

stands for risk factors. Total

risk is a combination between systematic risk (market risk) and unsystematic risk (firm-specific
financial risk). Systematic risk is the variability of return on stocks or portfolio associated with
changes in return on the market as a whole whereas unsystematic one is also the return variation
but not explained by general market movements. It is avoidable through diversification of
investment stock portfolio. In regard to market risk, an aversion investor can look at
macroeconomic and political conditions for their investment decisions. Damodaran (2002)
demonstrated determinants of ke as a function of interest rate, inflation, exchange rate, news
about economy and political stability. On the other hand, disregarding reinvestment rate b
determined by individual firm's dividend policy, ROE in the equation of growth rate should be
concerned. It is affected by the financing decisions of each firm via

13


ROE=ROC+D/E.[ROC-r(l-t)] [2.3]
•

Where

ROC: Return on capital investment
D/E: Capital structure (Debt over Equity)
r: Interest expense on debt
t: Tax rate on ordinary income

Therefore, expected growth rate of a stock will eventually base on both monetary and fiscal
policy changes since r is related to monetary policy and t refers to fiscal one. From all abovementioned equations, we can conclude that the change in stock price would be partially
determined by macro-economic variables related to interest rate, inflation, industrial production,
exchange rate, money supply, credit aggregate, taxation and government budget. The research
will employ some similar fundamental indicators based on this theory.

2.2.3 Inflation and Stock Market

Beside APT and DCF, two alternative studies about why inflation affects stock price
were discussed in Feldstein ( 1980) and Modigliani -Cohn ( 1979).
Feldstein's "Inflation and the Stock Market" indicated the inverse relation between
higher rate of inflation and sustainable reduction in the ratio of share prices to pretax earnings.
But what was the cause to the failure of price increase during a decade (1980s) of steady
inflation in US? This adverse effect resulted from the features of State tax laws, particularly
historic cost depreciation and the taxation on corporate-source income. Further, the study

14


analyzed the difference between the effect of high constant inflation rate and its increase
expected for future. If the steady-state of inflation rate is higher, stock prices would go up at
faster rate. And an increase in expected future of inflation rate would lead to a concurrent fall in

the ratio of share price to current earnings (PE). Then the price rises at higher rate of inflation but
PE ratio will be permanently lower as inflation pushes up the effective tax rate on corporate
revenue. Despite Feldstein's affirmation on the inverse influence of inflation on stock price via
US tax regime, he did not deny the anticipated factors - the slowdown in productivity growth,
booming cost of energy and increasing international competition - decreasing pretax
profitability. Sharing the same view of the negative relation between inflation and stock price,
Modigliani-Cohn approached it in different ways. The reason why the ratio of market value to
profits declined in the late 1960s is two errors in evaluating common stocks. The first is that
investors capitalize equity earning at a rate which is equal the nominal interest rate not
economically correct real rate. The second is that investors fail to allow for the gain to
shareholders accruing from depreciation in the real value of nominal corporate liability. In other
words, the inflation-induced errors are exposed to a permanently depressing effect on reported
earnings even to the point of turning real profit into growing losses. In short, the rate of inflation
is an indispensable proxy to measure the uncertainty of an economy in general or stock market in
particular.
2.2.4 Monetary Transmission Mechanism (MTM):
One more applicable theory within the analysis is Monetary Transmission Mechanism
(MTM). It describes how a monetary policy change affects some important macroeconomic
variables. The specific channels of MTM operate through the effects of monetary policy on
interest rates, exchange rates, equity and real estate prices, bank lending and corporate balance
15


sheet. According to Mishkin (2006), the increase in money supply may lead the rise of price
level and potential growing real output in the short-run, which can occur through four typical
channels like interest rate, credit, exchange rate and asset price channel. In case of Vietnam, the
credit channel explains much of the way in which credit as money supply affects real output. It is
more important than interest rate channel resulted from a study of Le Viet Hung, an expert from
Foreign Exchange Department (2008).

2.2.5 Efficient Market Hypothesis (EMH):
Lastly, one of the most influential theories of asset pncmg

IS

Efficient Market

Hypothesis (EMH) developed by Fama (1970). It asserts that financial markets are
informatively efficient when market prices incorporate and reflect all relevant available
information. There are three forms of market efficiency. If all available information is related to
past prices, it is classified into "weak form". And if it refers to all public information, the market
is defined as "semi-strong form" efficiency. Otherwise it would be "strong-form" when share
prices adjust to all public and private information. In the last form, investors cannot consistently
earn excess returns over a long period of time. The theory has a lot of disputes and controversy,
especially from technical analysts as they base their expectation on past prices, earnings track
records and other indicators to predict the market trends. In reality, it is very hard to become a
strong-form efficient market due to asymmetric problems.
According to the above-mentioned theoretical review, there remain two signs of the
dynamic interactions running from the key macro-economic factors to stock price. The negative
sign refers to the causality of interest rate, inflation and exchange rate to stock index. And the
positive exhibits its correlation with money supply and industrial production. Different from the

16


previous analytical evidence, the thesis is developed to find out some specific relationships
among key macro elements and the proxy variable of stock performance in the case of Ho Chi
Minh Stock Exchange. First of all is whether a consecutive credit growth, main independent
variable, over studying period has any impact on VN-Index immediately or within 12 months.
The research interest is raised from whether the same upward trend of data series (Figure 1) over

years presents a cointegration in long term and a causal relation in short term. Second, as
observed Vietnam investment market from 2002 up to now, almost individual investors have
changed the strategies toward money market when there are negative risk signals from stock
market. Banking deposit is one of safe substitutes. That is the reason why the research wants to
answer if money market is the most active investment alternative for equity in short-run. One
more discussion is the author's ambition to understand whether 4 selective variables of interest,
credit growth, foreign exchange, interest rate and inflation, have forecasting abilities to stock
volatility in long-run.

2.3 Empirical literature:
Ibrahim and Yusoff (200 I) from Malaysia employed mainly VAR, Johansen-Juselius Cointegration, Monetary Transmission Mechanism and AS-AD model to analyze the relationship
between Kuala Lumpur Composite Index (KLCI) with selective macro-indicator including M2
monetary aggregate as money supply, real industrial production to capture real economic
activities, CPJ and exchange rate (Ringgit/USD) expressed in natural logarithms. All the data
were collected in the period of Jan 1977-Aug 1998. As a result, they concluded that more money
supply leads to more positive effects on stock price in short-run and vice versa in long-run.

r

- . . . _l.]_ -

r ~
{J •r : J
i.

---rss
-,I
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Conversely, changes in stock price also drive the increase in demand for real money, interest rate
and subsequently the value of domestic currency. Furthermore, domestic currency depreciation
presented by exchange rate appreciation is both contractionary and inflationary. Therefore,
Malaysian authorities should pay attention to stabilizing their exchange rate and monetary
policies due to its adverse repercussion on financial market.
CooperMaysami, Howe and Hamzah (2004) tested the interactions between chosen factors
including interest rate, industrial production, price level, money supply, exchange rate and
Singapore Exchange Sector Indices of Finance, Property and Hotel by applying Johansen's
VECM model ( 1990) in multivariate context, a full information maximum likelihood estimation
model. Based on intuitive financial theory (Chen et al. 1986 & Fama 1981 ), the model allows for
testing a whole system of equation in one step and avoids carrying over errors from the first into
the second step. And the conclusion drawn from its empirical study is that Singapore stock
market and SES Ali-S Equities Property Index formed significant relationships with all
macroeconomic variables identified while the other two did with only selected ones. Specially,
the financial sector is significant affected by inflation rate, exchange rate and both long and
short-term interest rate whereas its relation to money supply is weaker in comparison with
Singapore's stock market as a whole. From this point, the authors came up with a statement that
"stock picking" could lead to superior earning capability.
Another research is from the case of Norwegian stock market. Anderson and Lauvsnes
(2007) did a research on co-integration between stock price index and domestic credit instead of
money supply used by other previous studies for forecasting purpose. Various methods and
comparisons were employed in their study. First, they compared forecasts from VAR models
with and without imposing co-integration restrictions with simple uni-variate models in different
18

forecasting horizons. Then it stepped up with comparing Mean Square Errors MSE and Mean
Absolute Errors MAE from 4 models: VAR log-differences, VAR - VECM, Random walk,
ARIMA(l, 1,1) in Box-JENKINs analysis. According to many problems happening since 1980s,
they particularly found financial turbulence with booms in stock markets, a strong overall growth
in credit and asset prices (property & stock), concerns about sustainability of domestic private
credit via excessive borrowing causing to increases in cost (e.g. interest rate) and reduction of
income as the result. In next step, these scholars tried answering relevant hypothesis: How to
improve stock index and credit growth forecasts? What are the fragile endogenous relationships
in economy (Minsky1987)? Does previously detected co-integration between these variables
contribute to forecast accuracy? Additionally, they addressed comparison between the out-ofsample forecast and previous in-sample results. They scientifically figured out the results that
Stock index is better predicted when co-integration is imposed. Credit variable is better predicted
with multivariate models than the uni-variate ones.
In the case of Thailand, many scholars from different approaches identified macro-economic
elements affecting their stock market performance. In 2007, Tantatape and Komain used cointegration model to test the long-run relationship and ECM to determine short-run deviation
from long-run equilibrium. The study collected monthly data of Money supply, FX, IPI and Oil
price, Inflation rate logarithm (1992-2003). In addition, Mahmood and Dinniah (2007) expanded
their study of 6 Asia Pacific countries consisting of Malaysia, Korea, Thailand, Hong Kong,
Japan and Australia to make a comparison at regional level. With the similar methodology
(ECM) and observation periods but less independent variables (exchange rate, inflation rate and
industrial output), the results came up with the co-integration between stock price and exchange
rate in Hong Kong market and industrial output in Thailand during 1993-2002. And

19


macroeconomic indicators in other countries seemed to produce a negligible impact on stock
return. From different approaches, Nguyen Dinh Tho (2010) employed Arbitrage pricing theory
(APT) to explore the behaviors of Thailand stock price against the changes of macroeconomic
factors. Moreover, the research discovered its relationship with exchange rate, IP growth rate,
inflation rate, current account balance, international-domestic interest rate difference and the

changes in domestic interest rate. He collected monthly dataset before Asia Financial Crisis
(from Jan 1987 to Dec 1998) to compute all with basic test of correlation coefficient to avoid
multi-colinearity, auto-correlation, ADF unit root test and finally OLS. The reliable result was
thanks to various tests on flexible combination of endogenous and exogenous variables. The
study ended with "Industrial production and exchange rate systematically affect stock returns
while the returns on value weighted SET index, used as a proxy of market portfolio, fails to show
its significance".
Regarding a limited number of empirical studies in Vietnam, Loc, Lanjouw and Lensink
(2008) conducted auto-correlation together with variance-ratio tests to discover whether Vietnam
stock market holds weak-form efficiency. It also answers the question if there is a possible bias
of the results caused by thin-trading that characterizes the market. The employed data was
collected on weekly basis (2000M7D28-2004M12D31). The findings scientifically reported that
Stock Trading Center (STC) is not weak-form efficient in thin-trading period, even in case, its
corrections of thin-trading are made. In the same year, Long (2008) used daily data of closing
stock price and return rate of index (%) in 2000-2007 period to examine stock return volatility
against regime changes. By testing in GARCH model, his predominant outcome proved that
Financial Liberalization has a negative influence on stock return variation. However, it is not
easy to separate the influence of Financial Liberalization on stock performance from that of the
20


growing number of IPOs (Initial Public Offering) because they coincided during research period .
•

Then Khuyen (2009) investigated the efficiency of Vietnam stock market via the lagged impact
of twelve macro-economic monthly variables in 2000M12-2009M6. These factors represent for
Real Production, Foreign Trade and Money Market indices. The time series were processed in
order by Stationary test, Cointegration and Granger Causality tests in both long and short run.
The results form multivariate analysis reinforced that Vietnam stock performance is not
informationally efficient. Thus, it is possible for any trader to earn abnormal returns by

understanding good or bad news of macro-economics. Besides, the articles confirmed that the
financial crisis worsened the inefficiency of stock market via monetary variables. As a result, the
market performance is not well functioning in scare resource allocation. It leads to less
attractiveness to encourage almost foreign and domestic investors.
Learning and developing from such above literatures, the research exploits further the
performance of Vietnam stock market via HOSE price index. Moreover, the other differentiation
is the selection of main independent variable, using credit growth instead of money supply in a
previous studies of Malaysia and Vietnam in order to explain their relationships if any. Besides,
the study keeps employ the similar fundamental economic factors including exchange rate,
inflation rate, interest rate, domestic deposit, industrial production to Asia Pacific researches.
Another is the input of compelling variables related to HOSE stock's co-integrations with US
stock index (Dow Jones) - the proxy for a developed market, China stock index (SSE) - the
proxy for an emerging market and gold price. All the up-to-date data (2002-2010) will be
collected for the quantitative estimation of stock performance via the below conceptual
framework (Figure 2.1). Among many econometric approaches applied in the reviewed studies,
the paper will only choose the 3 most suitable methods, Cointegration, Causality tests and

21


Impulse response functions, to test the target interactions between stock price and other
economic factors.
Let's discuss three main hypotheses that the paper will econometrically explain in
following parts. The first is to satisfy the author's question whether the positive interaction
between credit growth and stock price has existed as the scientific results of Norway and
Vietnam's former studies. In the recent context of Vietnam, Government has applied monetary
policy to stimulate the whole economy after Global crisis. Particularly, this is Government
Stimulus Package of 1 billion US dollars starting from 2009. So wonder if the enforcement
during that time took effect somehow toward stock performance and the entire economy. If yes,
it should be employed afterwards. The major query is translated into the below hypothesis

1. Credit growth has a significantly positive effect on the HOSE index within 12
months. The hypothesis will be tested using the following equation:
VN-Index = f(Credit growth rate t, t-1, t-2, .... t-n) in logarithm
The second developed from the controversy whether money market is a main investment
alternative when stock market is not attractive in short-term. As supervised over time, almost
local investors at HOSE often shift their investment to some alternatives such as bank deposit to
earn interest or avoid VND depreciation, gold or foreign exchange trade to obtain margin and
speculation in real estate with a big capital. The thesis will test on these channels except real
estate because of data limit and the big volume of capital. And below is described in term of
hypothesis.

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2. In Vietnam, money market is the most active investment substitution for stock
exchange compared to other studies markets in short-run.
Finally, the studies will go further to explore the individual relationship of some selective macro
indicators with stock index. It can be informative and useful for policy makers, stock investors
together with economic scholars then. Whether the selected macro factors have predictable
abilities for stock volatility is what the next sections will answer.
3. The credit growth rate is a more significant determinant of the stock performance
than the other macroeconomic factors of interest.
VN-Index = f(Domestic credit, Exchange rate (VND/USD), Inflation rate,
Industrial Production) in logarithm.

In summary, these three hypotheses above will be further analyzed by using either economic
theories or quantitative techniques throughout the thesis. And the following framework initially
presents the overview of all inclusive variables, resources as well as econometric tools.

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Figure 2.1: Conceptual Framework
VAR MODEL:
UNIT ROOT TEST (ADF)- STATIONARY
CO-INTEGRATION (EG & JJ)
ECM (long-term)
GRANGER CAUSALITY TEST (short-term)
VARIANCE DECOMPOSITION
IMPULSE RESPONSE FUNCTION

DEPOSIT
CO-INTEGRATION TO
DOW JONES & SSE.

EXCHANGE
RATE

INFLATION RATE
ESTIMATED

STOCK INDEX

STOCK MARKET
PERFORMANCE:

CREDIT
GROWTH RATE

REFERENCE FOR POLICY

MAKERS & INVESTORS

INTEREST RATE

INDUSTRIAL
PRODUCTION
GOLD PRICE

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MONTHLY DATA:
-IMF
-GSO
-Reuters
-Bloomberg


CHAPTER 3: RESEARCH METHODOLOGY

To investigate the relationship between stock performance and credit growth for the case
of Vietnam, this thesis establishes three hypotheses (i) there remains a positive short-run and
negative long-run relationship between credit growth rate and VN-index; (ii) Money market rate
has a Granger cause to the variation of stock price at significant level compared with other
factors; (iii) In the long-run multivariate relation, credit factor accounts for high percentage
effect on stock index. This chapter is divided into two main sections, research methodology and
data collection. The first section will introduce four econometric techniques to test for the
validity of three proposed hypotheses. First, the unit root test is used to test for stationary of all
variables. Second, with the bivariate and multivariate cointegration tests, the hypothesis (i) about
the long run relationship between credit growth rate and VN-index will be answered. Third, the
bivariate Granger causality tests are applied to check the directional relationship between

variables, especially the effect of interest rate on stock change - hypothesis (ii). The bivariate
Granger causality test is one of ways to exclude less significant variable(s) out of the suggested
model. Fourth, the short run adjustment of stock price is explored by employing both vector error
correction models and Impulse response function to answer for the hypothesis (iii). Next, the
second part will discuss how the thesis deals with proxy variables, data collection and data
analysis.
It starts with a summary of time series process through some technical tools employed in

the thesis like Vector Auto-regression, Unit root test for data stationary, Cointegration test for
long-term relationship, Granger test for causality, and Error correction model and Variance
Decomposition - Impulse Response Function

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