The impact of macroeconomics environment on vietnam stock returns

VIETNAM-NETHERLANDS PROGRAM
FOR MASTER OF ARTS IN DEVELOPMENT ECONOMICS

THESIS

THE IMPACT OF MACROECONOMIC
ENVIRONMENT ON VIETNAM STOCK
RETURNS
HUYNH PHI LONG
CLASS 18
A thesis submitted in Partial Fulfillment of the Requirements for
the Degree of Master of Arts in Development Economics

Under the Supervision of
Prof. Dr. Nguyen Trong Hoai

Ho Chi Minh city, NOVEMBER 2015


DECLARATION
This is to certify that this thesis entitled “The Impact of Macroeconomic
environment on Vietnam stock return,” which is submitted by me in
fulfillment of the requirements for the degree of Master of Art in
Development Economic to the Vietnam – Netherland program. Thesis
constitutes with my work and good supervision Assoc, Prof. Dr. Nguyen
Trong Hoai and acknowledgment that have been made in the text in all
material used.
HUYNH PHI LONG

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ACKNOWLEGMENT
First of all, I would like to express my appreciation to my supervisor, Prof
Dr. Nguyen Trong Hoai, for his invaluable advice and encouragement in
during the time that I do my thesis. . I have been lucky to have a supervisor
who care so much my thesis and answered to all my question. Without his
guidance, my thesis would not be finished.
Second. I would like to give my special thanks to Dr. Pham Khanh Nam and
Dr. Truong Dang Thuy for his valuable suggestion that help to complete my
thesis.
Third, I would like to give my appreciation to all the lecture at the Vietnam –
Netherland programme for their knowledge of all the course, during the time
I studied at the programme.

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ABSTRACT
This paper estimates the impact of macroeconomic environment on Vietnam
stock returns and drawing the conclusion of the impact of macro variables on
stock market in order to offer some appropriate policies to improve stock
market and provide investors of more information. This study uses multiple
regression analysis with monthly dataset for recent years from 01/2004 to
08/2013 to evaluate the relationship between macroeconomic factors and
stock returns. The model explains well the movement of stock return and
shows that three variables (CPI, S&P500 and exchange rate) have significant
effects on performance.

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TABLE OF CONTENT
Chapter 1 INTRODUCTION ....................................................................... 1
1.1 Problem Statement ..................................................................................................... 1
1.2 Research Objectives .................................................................................................... 3
1.3 Research Questions ..................................................................................................... 4
1.4 Research scope and data ............................................................................................. 4
1.5 Thesis structure ........................................................................................................... 4

Chapter 2 LITERATURE REVIEW ........................................................... 5
2.1 Endogenous growth theory ........................................................................ 5
2.2 Empirical studies ........................................................................................ 7
2.3 The results of testing the influence of macroeconomic factors on world
stock markets .................................................................................................... 9
2.3.1. An overview of the relationship between stock and macro factors in each
country ...................................................................................................................... 9
2.3.2. Evidence from U.S. stock market ................................................................ 11
2.3.3. Evidence from stock markets: Brazil, India, China, Russia ........................ 11
2.3.4. Empirical evidence in Thailand ................................................................... 12
2.3.5. Evidence from stock market in London ....................................................... 13

2.4 Research Hypotheses................................................................................ 15
2.4.1. The impacts of Industry production on stock return ................................... 15
2.4.2. The impact of inflation on stock return ........................................................ 16
2.4.3. The impact of interest rate on stock return .................................................. 17
2.4.4. The impact of exchange rate on stock return ............................................... 18
2.4.5. The impact of oil price on stock return ....................................................... 21
2.4.6. The impact of gold price on stock return ..................................................... 22
2.4.7. The impact of different stock markets on each other .................................... 23

2.5 Conceptual framework ............................................................................. 25
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Chapter 3 RESEARCH METHODOLOGY ............................................. 28
3.1 Data source ............................................................................................... 28
3.2 Methodology ............................................................................................ 30
Chapter 4 RESEARCH RESULTS ........................................................... 32
4.1 Bivariable analysis .................................................................................... 32
4.1.1.The impacts of Industry production on stock market ................................... 32
4.1.2. The impact of inflation on stock market ...................................................... 33
4.1.3. The impact of interest rate on stock market ................................................. 35
4.1.4. The impact of exchange rate on stock market ............................................. 36
4.1.5. The impact of oil price on stock market ...................................................... 37
4.1.6. The impact of gold price on stock market ................................................... 38
4.1.7. The impact of different stock markets on each other................................... 39

4.2 Analyzing the return of investment (ROI) of VN-index by the
multivariate model .......................................................................................... 41
4.2.1. Correlation matrix ........................................................................................ 41
4.2.2. The multivariate model ................................................................................ 44

Chapter 5 CONCLUTION ......................................................................... 47
5.1 Summary of results ................................................................................... 47
5.2 Policy recommendation ............................................................................ 49
5.3 Limitation of the study ............................................................................. 50
REFERENCES ............................................................................................. 52
APPENDIX ................................................................................................... 58
SOURCE OF DATA .................................................................................... 68

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LIST OF TABLE
Table 2.1 Conceptual framwork ............................................................................ 25
Table 3.1 The expected sign of variable in model ................................................ 28
Table 3.2 The correlation on the sample observations .......................................... 41
Table 3.3 The result of regression model .............................................................. 42

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LIST OF FIGURE
Figure 3.1. The proportion of the value of good in Viet nam ............................... 32
Figure 3.2. VN index and Industrial production ................................................... 33
Figure 3.3. VN index and Inflation ....................................................................... 35
Figure 3.4. VN-Index and interest rate .................................................................. 36
Figure 3.5. Vn index and exchange rate ................................................................ 37
Figure 3.6. Vn index and Oil price ........................................................................ 38
Figure 3.7. Vn index and Gold price ..................................................................... 39
Figure 3.8. Vn index and S&P 500 ....................................................................... 40

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CHAPTER 1: INTRODUCTION
1.1. Problem Statement
Pramod K Complaints and Puja Vidhi (2012) showed that stock market has an indirect
impact on the developing by playing a crucial role in its two primary components: industry
and commerce. Therefore, in the investors view, the stock market also occupy an important

position. Securities is reputedly a source of long – term capital. In consequences, investors
could supply capital to companies which are in case of need through the stock market. In
another word, securities allow companies to expand their business as well as provide a
surplus fund to the capital market. Before investing in securities, investors should have a
thorough grasp of the market by observing the fluctuation of different index. Analysing the
various indicators is an effective method to have a comprehensive view of the stock market.
Then, investors can forecast the trend of stock market in the future, make up efficient
portfolio to gain the highest profit.
The efficient market hypothesis proposed by Fama (1970) placed a very significant
economic theory for policy makers and investors. Accordingly, policy makers are free to
implement global policies without worrying about changing the essence of stock market,
since they only change the share prices. Also, economic theory hypothesizes that stock price
reflects not only the available information but also the expectation of firms’ future operation.
If stock price can accurately reflect the macro environment, it can also be used to be an
indicator of future global conditions. Therefore, studying the causality and mutual
interactions between macro variables and stock price is of great important when the
Government is considering any policies for the nation.
In the literature, relations between economic variables have been researched to give
explanations to those relations, specifically, the effects of macroeconomic variables such as
industry production, money supply, inflation, exchange rate, gold price, etc., on the stock
price, and the relation between those macro variables. In Vietnam, changes in global policies
and macro variables are often occurring abruptly, leading to strong effects, which are both

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negative and positive, to investors’ sentiment. By applying econometric models, we may
have the more general view of the risks and volatility of VN index, generating forecasts and
cautionary for investment activities. That research are based on econometric tests with highly
reliable data and general view of the yield on Vietnam stock market.

However, many research has proceeded for the stock market and economic factors, and,
therefore the conclusions may not be enough. As a result, it has been argued that the risk
factors from the local rather than risk factors from the world are the primary cause of
variation in the stock market According to Hooper, Brailsford, and Bilson (1999) solve the
problem of macroeconomic variables that can derive from sources of local risks. Sims and
Maysami have used Error Correction Modelling techniques to check the relationship
between macroeconomic variables and profit shares in Hong Kong and Singapore ( Koon.,
Wee and Maysami (2004)). Through the Koon., Wee and Maysami (2004), their methods
had facilitated to infer relationships between the variables short-term macroeconomic
adjustment and balanced long-term, they analyzed the impact of interest rates and inflation,
money supply, exchange rates and fluctuations, in fact, with a dummy variable to capture the
effects of the Asian financial crisis in 1997. The results can be verified that the impact of
macroeconomic variables on the stock market index in each of the six countries being
studied, although the type and size of different associations depending on the financial
structure of each country. Raman K. Agrawalla (2010) attempts to find whether the
economic factor can reflect stock price. The relations of some macroeconomic factors may
change from markets to markets; may vary during various form and also at different
frequencies of data. Therefore, much intensive research necessary for understanding the
macroeconomic variables that can affect the stock market. Moreover, the capital markets
have experienced significant changes when to apply the policy liberalization, and it became
more open to international investor The reform of market and potential economic had
attracted a large number of foreign institutional investors in the stock exchange.

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Vietnam stock market opened on 28 July 2000 with only two stocks, and now in 2013, it has
over 700 stocks with the market cap of about VND 964000 billion, equivalent to 31% of
GDP. Since inception, Vietnam stock market has benefited the economy.
Firstly, when investors buy shares, they contribute their money to the company’s

business. The Government and local authority also raise fund to invest and develop
economic infrastructure.
Secondly, stock market offers investors a healthy investment environment with a lot of
investment options, and this is a new investment channel with high liquidity, apart from
the traditional ones such as gold, forex, and real estates.
Thirdly, stock market helps to improve the transparency of companies’ business,
providing an ambitious investment scheme, hence improving the capital efficiency,
giving companies incentive to apply new technologies.
Fourthly, the stock market index reflects the economy promptly on time and accurately.
Stock price increasing implies investment expansion and a growing economy, and vice
versa. Therefore, the stock market is seen as an indicator of the economy and an
important channel for the Government to implement macroeconomic policy.
In the past few years, the world economy has experienced several critical period and facing
challenges such as recession, inflation, unemployment. Vietnam is not an exception, as it
also has troubles with high inflation, budget deficit, high sovereign debt, fluctuated exchange
rate… These effects are not only on the economy but also on the stock market. Therefore,
studying the impacts of macro variables on the stock market is crucial. The paper aims to
provide new evident for investors and companies as well as policy makers about the role of
macro variables before they participate in the stock exchange as well as design appropriate
policies related to stcok market in Vietnam.

1.2. Research Objectives
1. Determining the impact of macroeconomic environment on Vietnam stock returns.

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2. Drawing the conclusion of the impact of macro variables on stock market in order
to offer some appropriate policies to improve stock market activity and provide
investors of more information.

1.3. Research Questions
There are two keys research questions to be answered as below:
1. Can internal macro variables such as inflation, exchange rate, oil price explain
stock return?
2. Can external variables such as the US stock market affect stock price?

1.4. Research scope and data
This study tests the impact of macroeconomic environment on Vietnam stock returns. From
the findings of this paper, this study uses multiple regression with monthly dataset for recent
years from 01/2004 to 08/2013 to test the relationship between stock returns and
macroeconomic variables (industry production, inflation, interest rate, exchange rate, oil
price, gold price, different stock markets).

1.5. Structure of the Thesis
The paper contain four chapters: chapter 2 introduces theoretical and empirical studies about
the impact of macroeconomic factors (industry production, inflation, interest rate, exchange
rate, oil price, gold price, different stock markets) on Vietnam stock return. Chapter 3
presents regression model and key variables that is used in this paper. Chapter 4 provides an
overview about the impact of macroeconomic environment on Vietnam stock returns.
Moreover, the descriptive statistics of the sample are also refered in this chapter.
Concurrently, analyzing and discussing the regression results are also mentioned in this part.
Chapter 5 summarizes analyses and results from the previous parts to propose
recommendations and related policies as well as the limitations of this study.

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CHAPTER 2: LITERATURE REVIEW
This chapter introduces four main parts. The first part reviews theoretical backgrounds about

the stock return. The second part provides some empirical studies in the Vietnam and the
world. Third part summarizes some of the results of testing the macroeconomic impacts on
stock return. The last part is research hypotheses and analytical framework.

2.1.

Endogenous growth theory

None of the good theories assert that the relationship between financial market and
macroeconomic factors entirely is only in one direction. However, the stock price is often
considered the reaction to the external effects (even they also impact on other variables).
Obviously, all the economic variables are endogenous ones in the key judgments. Only
natural agents such as meteors, earthquakes, or anything like that, are truly exogenous
variables for the world economy. The purpose of Chen, Roll and A.Ross (1986) is simply to
set up capital stock the rate of return model as functions of economic variables and the rate
of return of non-capital assets (debt). Thus, the study of Chen, Roll and A.Ross (1986) have
seen the stock market as endogenous variables and related to other markets.
As the debate on hide function diversification in theories of capital markets, only the basic
economic variables affect the price of most stock markets prices. Any system variables affect
the pricing decisions of the economy or affect dividend, then also affect the rate of return on
the stock exchange. Moreover, the variables needed for the description of government will
also be part of the description of the systematic risk factors. For example, such a variable
will not directly impact on current cash flow but will reflect changes in the investment
opportunities.
Stock price is often calculated by expected dividend discounted at present:
p

E (c )
k

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Here, p is stock fair value, c is dividend stream and k is discount rate,.. This leads to real the
rate of return on the stock market in the calculated periods
dp c d  E (c) dk c
 
 
p p
E (c)
k p

Chen, Roll and A.Ross (1986) found that system agents that affect the rate of return on the
stock market are the agents altering discount rate k, and expected cash flow E (c).
The discount rate is the average rate over time, and it changes both the size and the
difference in the term structure through different maturities. Therefore, the changing in the
risk-free interest rate will impact on prices, and impact on the rate of return on the stock
market through its influence on the time value of cash flows in the future. The discount rate
also depends on risk premium. So, the unusual volatility of the risk premium also affects the
rate of return on the stock market. About demand, the changes in indirect marginal utility of
real asset, which can be measured by changes in real consumption, will affect prices, and this
effect can be shown as the abnormal fluctuations in risk premiums.
The expected cash flow changes because of both real and nominal factors. The changes in
the expected inflation rate will affect the expected nominal cash flow as well as nominal
interest rate. These abnormal fluctuations in prices will have a system impact on the scope of
the evaluation in a real period. And they also have changes in asset values associated with
changes in average inflation rate on the extent that the relative price changes with overall
inflation. Finally, changes in the level of expected real production will impact on the net
present value of cash flows. The changes in the rate of production activity may affect the rate
of return on the stock market to the extent that the risk premium cannot calculate the

volatility of industrial production through its effect on cash flow.
According to Chen, Roll and A.Ross (1986), individual stocks depends on expected and
unexpected elements. They believe that most of the profit received from stock is the result of
unforeseen factors and these factors related to the standard conditions of the economy. In

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reality, despite the interests of assets may also be affected by the impact that do not relate to
the economy, profit from the large portfolio often take the main risk from systemic risk.

2.2. Empirical studies
2.2.1 World studies
Through article by Hendry (1986), his approach has allowed inferences to short-term
relationships between macroeconomics variables as well as the adjustment of balance in the
long term, they have classified effects of money supply, inflation, exchange rates, interest
rates and practical activities, with a dummy variable to capture the influence of the Asian
financial recession in 1997. The obtained results confirmed the effect of macroeconomics
variables on the stock market index in each country studied, although the type and size of
various associations depending on financial configuration structure of each country.
Islam (2003) studied the relations in the short and long-term balance between the stock
return and interest rates four macroeconomics variables: inflation rates, interest rates,
industrial productivity and exchange rates at Malaysia stock market. The conclusion of is the
same: there are statistically exist in short and long-term equilibrium relationship between
macroeconomics variables and stock returns in the Malaysia stock market.
The article by Ibrahim (1999) also examined the relationship between the Kuala Lumpur
stock exchange Composite Index and seven macroeconomics variables includes: M1 and M2
money supply, projected foreign currency reserves, consumer price index, credit institutions,
industrial production index and foreign exchange rates. Observe macroeconomics variables
leading the Kuala Lumpur stock exchange Composite Index, he concluded that the Malaysia

stock market is asymmetric information
Findings of Chong and Koh (2003) are similar: they have shown that stock prices, economic
activity, the real interest rate and balance balances in Malaysia to link together in the long
term.

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Mukherjee and Naka (1995) apply error correction vector model of Johansen (1998) to
analyze the relationship between the Japanese stock market and inflation, exchange rates,
actual economic activity, money supply and rate government bonds in the long term. They
concluded that a real relationship between these factors and the stock price. Simultaneously,
Maysami and Koh (2000) also examined the relationship between the stock price and the
factors on the stock market in Singapore. They found that the relative growth in the money
supply, inflation, changes in short and long-term interest rates and the exchange rate had an
impact on the change in stock price on the Singapore stock market.
Watanapalachaikul and Islam (2003) shows that close relationship between the price of
long-term securities and macro factors: the price of bonds, capital markets, consumer price
index, exchange rate and interest productivity in Thailand during 1992 to 2001. Article by
Omran (2003) studied the impact of the actual rates as an important factor in the operation of
the Egyptian stock market, both in terms of market activity and liquidity.

VietNam studies
According to Nguyen Minh Kieu, Nguyen Van Diep, Le Hoang Tam (2013), the study of the
impact of macroeconomic environment on Vietnam stock returns will help the Government
to make reasonable policy and help investors to make decisions in Vietnam stock market. In
Vietnam, changes in policy and macro variables have effects substantially, both negatively
and positively, on the stock market and investors’ sentiment. Therefore, studying the
relations between macro variables and Vietnam stock market is of great important.
According to Nguyen Minh Kieu và Bui Kim Yen (2009), variables affecting stock market

include inflation, money supply, foreign exchange, gold price…Meanwhile, other
researchers suggest others elements that have impacts on the stock exchange, such as
industry production, changes in the trade balance, interest rate, oil price, different equity
markets.
Phan Thi Bich Nguyet and Pham Phuong Thao Duong (2013) had mentioned having
mentioned empirical studies about the impact of macroeconomic factors on the stock market,
the results of research on this topic have many differences in each market. After forming

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stage and operation, Vietnam stock market had made a tremendous contribution to Vietnam
economy. However, the stock market is still many inconstant and potential risks. The up and
down of the Vietnam stock market in recent years due to many different factors that can not
exclude the impact of macroeconomic factors.
Phan Thi Bich Nguyet and Pham Phuong Thao Duong (2013) based on Arbitrage Pricing
Theory (ATP) by Chen, Roll, Ross (1976) to explain the rate of return on the stock market.
APT theory assumed that the expected profitability of securities is determined by the
equation k factors: Rj = αj + βj,1F2 + … + βj,kFk + up. The APT factors in the model may
be macroeconomic factors or macroeconomic factors. According to the research, variables
affecting stock market include industrial production, consumer price index (CPI), money
supply, GDP, exchange rates, interest rates, inflation, political risk oil prices, trade area, and
the other stock markets.
The research aimed at testing for considering whether there are relationships between the
macroeconomic factors and the stock market. The research results showed that the variables:
money supply, inflation, industrial output (representing real economic activity), world oil
prices were a positive correlation with the stock market while the interest rate and exchange
rate between VND/USD show the negative correlation with the stock exchange. By these
findings, the authors suggest policy implications for macroeconomic management and the
market with the aim to develop a professional stock market.

2.3. The results of testing the influence of macroeconomic factors on
world stock markets
2.3.1. An overview of the relationship between stock return and macro
factors in each country
One of the earliest studies giving us convincing evidence about the behavior of securities
prices with macro variables for emerging markets is conducted by Kwon, Shin and Bacon
(1997) for the Korean market from Jan1980 to Dec1992. The independent variables include
index of industrial production, inflation, expected inflation, risk premium, term structure,

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dividends, trade balance, exchange rates, oil prices and money supply. All these variables
will be regressed on monthly data series of the stock price-weighted index. Research results
indicate that the stock market in Korea is more sensitive to the real economy and
international trade than in the United States and Japan. That is expressed through the
exchange rate, trade balance, money supply and industrial production index.
The most general study of the relationship between stock and macro factors is built by
Muradoglu, Taskin, and Bigan (2000). Muradoglu and colleagues examined the relationship
between the rate of return of 19 emerging markets: exchange rate, interest rates, inflation and
industrial production from 1976 to 1997. As a result, the relationship between the rate of
return on the stock market and macroeconomic variables depends on the size of each market
and its contribution to the international market. In the study on the relationship between the
Greek stock market with 18 macroeconomic variables in the period from 1980 and 1992,
Diacogiannis and colleagues have found strong relationships between the rate of return on
the stock market with 13 of the 19 variables that they examined in the two periods, 19801986 and 1986-1992. Wongbangpo and Sharma discovered the relationship between the rate
of return on the stock market with five macro variables in five ASEAN countries were
Indonesia, Malaysia, Philippines, Singapore, and Thailand. By observing the relationship in
both the short and long term of each security index and variables as GNP, CPI, money

supply, interest rates, and exchange rates, as a result, in long-term, all five indexes have the
definite relationship between output growth and the current price.
In the long term, although the relationship between the market rate and interest rate is not
reflected clearly in markets such as Philippines, Singapore, and Thailand, it is fairly clear in
markets such as Indonesia and Malaysia. Finally, the correlation testing leads to an overall
result that there exists the relationship between the market and macro variables for these five
ASEAN markets. After all, Mukhopadhyay and Sarkar establish a the rate of return on the
stock exchange system analysis for Indian market before and after the liberalization of
markets and the impact of macroeconomic factors on the rate of return on the stock
exchange. Specifically, after liberalization period (since 1995), economic activity, inflation,

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money supply growth, FDI, and NASDAQ index are significant in explaining the rate of
return on the stock market in the Indian market. While during the period before liberalizing
(1989 -1995), the nominal exchange rate makes sense but after a period of liberalization yet.

2.3.2. Evidence from U.S. stock market
One of the popular papers of the multi-factor model is the study "Economic forces and the
stock market" by Chen - Roll - Ross wrote in 1986. To illustrate the various effects of
macroeconomic variables in the stock exchange, the research is done through testing in the
U.S. market. This study considered seven factors include: changes in industrial production,
risk premium, term structure, inflation, the rate of return on the stock exchange, actual
spending and oil prices. Data are collected monthly from Jan 1953 to Nov 1984. Results
showed that some economic variables are proved to be significant in explaining expectations
the rate of return on the stock market, especially industrial production, changes in the risk
premium, the yield curve, and a few weaker variables as the extraordinary inflation measure
and changes in expected inflation during high volatility periods. The author has also tested
the effect on the valuation of securities changes in real per capita consumption and oil price

index changes. But the results show that there is not a full impact.
Results also showed that the rate of return on the stock market is expressed through the
commercial information system, their risk prices them, and the information can be measured
as the change in the variables that I can get the pure financial theory and intuition.

2.3.3. Evidence from stock markets: Brazil, India, China, Russia
In the paper, "Effect of Macroeconomic variables on stock market returns for four Emerging
economies: Brazil, Russia, India and China" done by Robert D. Gay (2008), he conducted
testing the effects of macroeconomic factors on the stock market using the Box - Jenkins
method - ARIMA model. To describe this relationship, the author used the one month
average MA, three months, six months and 12 months for the latency of a stock price
dependent Variable and exchange rate, oil price variables. Data are collected monthly from
March 1999 to June 2006 for four countries: Brazil, Russia, India, and China

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The analysis results show that there is the same direction relationship between price rate and
stock price in the markets: Brazil, Russia, and China. This means that high (low) currency
pricing compared to the U.S. dollar will have negative (positive) impacts on the domestic
stock market. A rise in oil prices will negatively impact on the stock exchange. Analyzing
the impact of international macroeconomic factors such as exchange rates and oil prices in
equity markets of China, Brazil, India and Russia does not show a clear relationship. This is
based on the parameter values of the independent variables and the corresponding p-value,
along with the parameter R2 for each model.

2.3.4. Empirical evidence in Thailand
The study "Economic Forces and the Thai Stock Market" done by Komain Jiranyakul
(2007), explained the relationship between stock price index and macroeconomic variables in
Thailand. Data was collected quarterly from the first quarter of 1993 to the fourth quarter of

2007.
Testing results showed that the variables are associated with each other, and have a longterm relationship between the stock price index and four macroeconomic variables: real
GDP, money supply, nominal exchange rate and inflation. Especially, the financial crisis in
1997 is without impacts on security price. The results of the testing (the model error
correction) showed the relationship between TSSL of the stock market with growth rates in
the short and long term. Real GDP, nominal exchange rate, money supply have an impact on
the price of securities in the same direction while inflation has an adverse effect on securities
prices.
To establish a long-term relationship between the variables in the model, the author finds the
reason in the short term and long term of the fundamental difference between the variables.
As a result, based on theory Granger, that shows that there exist a link between the variables.
Besides, the author also predicted coefficients in ECT (error correction term). These factors
represent adjustments in long-term while the short-term boom is described by the delay price
coefficients of the fundamental difference. The results showed that stock price and real GDP
in the long-term.

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2.3.5. Evidence from stock market in London
The objective of the study "The Effects of Macroeconomic Factors on the London stock
returns: A Sectoral Approach” of authors Nil Giinsel & Sadik Cukur (2007) is to analyze
APT applications to price stock in the UK, and to determine the macro variables that best
suit the market factor. The research is developed into 7 macro variables, including term
structure of interest rates, unexpected inflation, industrial production, risk premium, money
supply (M0), and unexpected dividend rate and considering the impact of these variables on
the food industry, drinking water, and tobacco; construction; building materials and trade,
electrical and electronic equipment; Mechanical Engineering; Household, goods and textiles;
Manufacture of paper, packaging and printing; Chemicals; Diverse industries; And mining
and oil production. Observed sample includes companies being available in the data stream

from January 1980 to December 1993.
The regression results showed major differences of industry category compared to macro
variables. R2 ranges from 28 % - 94 %. The reason is that the use of variables such as
industrial production sectors unexpected dividend rate. Test results also show the
significance level of 1 %, the coefficient of the dividend yield is negative for all sectors. This
is not too surprising because the price of securities is determined by the expected dividend
stream in the future. However, it is expected to be positive. Results being contrary to
expectation can be explained based on the practical theory. This means that investors will
forecast dividend flow before being noticed. In this case, it seems that investors expect a
dividend level being very different from reality. This may be due to unexpected dividend
yield. The authors use the unchanged modeling expectation to find the variable. On the
market, investors use many different tools to predict profit as accounting data, expectations
about industry or economy.
Unexpected inflation has not any effects on TSSL sector, excepting for food, drinks and
tobacco affected about 10 % according to the inspection results. This means that the market
reflects the inflation numbers approximately compared to the real inflation rate.Risk
premium has the same direction impact with TSSL of construction and engineering.

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However the industry has some similar characteristics, we cannot conclude that the risk
premium has the same direction impact on all industries because the risk premium for one
month shows the opposite effects.
Although effective exchange rate is a critical factor, it does not mean it will affect the
yielding of an industry. That's because businesses often use tools like derivatives to hedge
exchange rate. So, it would not be too surprised if we do not find any relationships between
the exchange rate in effect and yielding of an industry. Results mention two areas: building
material impacts the same direction with the profit rate of the construction materials industry
and commerce; food, drinks and tobacco; and have the adverse effect on the rate of return of

household goods and textiles.
Term structure of interest rates with one month delay has an impact in the same direction
with a profit rate of four sectors: Construction, food, drinks and tobacco; mining and
petroleum processing; electrical and electronic equipment. Based on the testing results, we
can see the interest rates in short-term could have an impact on the same direction with the
construction industry; food, drinks and tobacco, mining and oil and gas processing.
Especially, electronics industry because the electronics industry requires high fixed capital
investment and the long-term capital recovery.
Calculations of industrial output show a different relationship with food, drinks and tobacco
industry at the 5% significance level. Industrial production with three-month latency also
shows a negative effect of this variable on the paper industry, packaging, and printing with a
significance level of 1%. Similarly, with a significance level of 1%, industrial production
also has opposite effects in engineering. However, at a significance level of 5%, industrial
production with one-month latency has an impact in the same direction with household
goods and textiles.

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2.4. Research Hypotheses
2.4.1. The impacts of Industry production on stock return:
George Filis (2009) states that industry production always induce moves along with
economic cycle, i.e., it increases in recovery and successful session, a drops in recession. It is
usually used as a measure of economic activities. An increase in industry production
anticipates an economic growth. John K. M. Kuwornu (2011), Sezgin Acikalin, Rafet Aktas
and Rafet Aktas (2008) show the positive relation between industry production and future
expected cash flows.
The production capacity of the economic depends strictly on the procedure of real assets
accumulation, which contributes to the companies’ ability to create cash flows. Peter Young
(2006)’s discovery, based on a portfolio of US stocks, shows that future increase of industry

production help to explain stock return and the relation is positive. The potential explanation
is increased industrial production leads to increase in economic activity resulting in higher
earning for companies. The potential higher earnings should result in rising in stock
valuations resulting in stock gains. In a research of Harrison Hong, Walter Torous and
Rossen Valkanov (2007), he also finds the definite relation between the growth of industry
production and stock return. Kewei Hou and David T Robinson (2006) have contributed
some endogenous growth models under which macroeconomic environment could affect
stock returns.
The rate of growth of industrial output is tested because the stock market has a relationship
with changes in industrial activities in the long term. Share price includes the value of future
cash flows, and a growing economy will increase the ability to generate the cash flow of the
company in the economy thereby increasing share prices and increasing the rate of return on
the stock market. The rate of return of stock monthly cannot be highly correlated with
seasonal changes in industrial output. However, these changes may contain relevant
information for pricing. The monthly changes in securities prices reflect the change of
expected industrial production in the future.

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It is hypothesized that there is a positive relationship between growth of industrial
production and stock return.

2.4.2. The impact of inflation on stock return
Research of Paolo Giordani and Paul Soderlind (2002), Geert Bekaert and Eric Engstrom
(2008), A.Ang, Monika Piazzesi and M.Wei (2006) impress the negative relation between
inflation and stock price. The stock market is likely to boom under the two conditions: high
economic growth and low inflation. As such, a growing economy associating with high
inflation is not necessarily ideal. When inflation becomes a threat, investment analysts may
doubt the prosperity of economy and reports showing any increase in the employment rate.

They fear that there is a high inflation caused by expansion of credit as a result of the
Government growing budget deficit and expanding monetary supply.
The relationship between inflation and stock prices is controversial, and it will change over
time. Empirical evidence from developed countries shows that the relationship is negative
because inflation determines the root of growing. High inflation is a sign of the overheated
economy, indicating an unstable economic growth while stock market acts as the indicator of
economic health. When inflation raises, purchasing power of currency shrinks, investors tend
to hold cash less. They instead invest in gold, real estate, foreign currencies… leading to a
shortage of capital which is supposed to be invested in regular business such as
manufacturing. The growth of companies, and hence the whole economy will be slow down.
High inflation also affects business in the sense that even profitable companies with high
dividend may not be attractive as real investment return is diminished, making stock
investment no longer an unusual channel. In a book that review the inflation and US stock
market during a long period from 1929 to 1981, Stephen Leeb states that inflation is the foe
of the stock market.
Increasing inflation is understood to cause an adverse impact on the rate of return on the
stock market. Because inflation is often accompanied by input prices of most businesses such
as borrowing cost, the cost of sales, the cost of production ... which are increasing. But

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companies can not immediately increase output prices thus the profitability of the enterprise
will be reduced, this leads to stock price reduction
Increasing inflation also has adverse effects like: Increasing in selling distressed securities to
withdraw capital from the stock market and increasing in buying real securities for "hidden"
inflation. This sell-off trend often occurs when the market has a lot of low-quality securities,
or the confidence of investors in the market is weak.
It is hypothesized that there is a negative relationship between inflation and stock return.

2.4.3. The impact of interest rate on stock return
Based on the evidence surveyed by Graham and Harvey (2001), interest rate risk is
considered as a second important risk, the first is the market risk. Graham and Harvey said
that the interest rate volatility not only affects the company's expectations of future cash
flows but affect the discount rate to assess the cash flows and the value of the enterprise. The
effect of interest rate on the market value of the firm has always received a lot of attention of
economists. However, changes in interest rates can have a significant impact on nonfinancial companies, mainly through their effect on the financial costs and the value of
financial assets and liabilities organized by these groups (Bartram, 2002).
Krishnamurthy and Jorgensen (2011) prove that a change in interest rate, no matter whether
it is of long term or short term, of Interest rate affects the minimal risk-free rate, therefore,
affects the discount rate and stock price. Fama and Schwert (1997) observe the relation
between stock price and a lag value of interest rate. Reily and Brown (2011) make a more
sophisticated statement that capital flow into stock market may change upon interest rate and
that there is no certainty of whether the inflow will increase or decrease in response to a
particular movement in the interest rate. Recent papers examining the relation between
interest rate and stock market show no definite answer.
The rise in the money supply leads to restructuring the portfolio investment shifting to real
property. This increases the pressure on securities prices. Therefore, the rate of return on the
stock market reflects the changes in the nominal money supply unexpectedly. In theory,

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