The impacts of capital flows on vietnam stock market

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

VIETNAM- NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE IMPACTS OF CAPITAL FLOWS ON
VIETNAM STOCK MARKET.

BY

TRAN TUYET HANH

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, NOVEMBER 2012


UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

VIETNAM- NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE IMPACTS OF CAPITAL FLOWS ON

VIETNAM STOCK MARKET.
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

TRAN TUYET HANH

Academic Supervisor:

DR. NGUYEN HOANG VU

HO CHI MINH CITY, NOVEMBER 2012


DECLARATION

I hereby certify that the substance of the thesis has not already been submitted for any
degree and is not being currently submitted for any other degree.
I also certify that, to the best of my knowledge, and help received in preparing the
thesis and all sources used have been acknowledged in the thesis.
Signature

TRAN TUYET HANH
Date: ..................... .

ACKNOWLEDGMENTS
i

I would like to express my gratitude to all those who gave me the possibility to

complete this thesis.
I am deeply grateful to my supervisor Dr. Nguyen Hoang Vu from Department
of Mathematic and Statistics, Dr. Nguyen Trong Hoai-Vice President, Dr. Pham
Khanh Nam from Department of Development Economics , University of
Economics Ho Chi Minh City whose support, stimulating suggestions and
encouragement helped me in all the time of research for writing this thesis.
I am also very grateful to all lecturers of the Vietnam-Netherlands Programme
for giving me knowledge and guidance to fulfill the M.A Programme.
I would like to thank all the members of the Vietnam-Netherlands Program,
especially, VNP Library for helping me to have necessary documents and
research papers during my completion of the thesis.
Finally, I am indebted to my parents whose love, sympathy and encouragement
enabled me
to complete this thesis. I am also thankful to my classmates for their warm
encouragement.


ACRONYMS AND ABBREVIATIONS

FDI

Foreign Direct Investment

FPI

Foreign Portfolio Investment

FII

Foreign Indirect Investment

WTO

World Trade Organization

VSM

Vietnam Stock Market

HOSE

Hochiminhcity Stock Exchange

HNX

Hanoi Stock Exchange

PIE

Price-earning

VN-Index

Vietnam Index

IPO

Initial Public Offering

OTC

Over The Counter Market

LDCs

Less Developed Countries

liP

Index of Industrial Production

VAR

Vector Auto regression

ADF

Augmented Dickey Fuller

pp

Phillips Peron

ECM

Error Correction Model

SBV

State Bank of Vietnam

sse

State Securities Commission of Vietnam

CPI

Consumer Price Index


ABSTRACT
This thesis investigates the impacts of FPI flows on Vietnam stock market (VSM). In
other words, we aim to examine whether a long-run or short-run impact of FPI flows on
VSM exists or not. And, if any, how long does it take for changes to be fully effective?
We use the mol!thly time series data of VN-Index and FPI flows from July 2000 to June
2012 to analysis. In order to calculate the growth rate of VN-Index, we take logarithm
ofVN-Index series and denote it as Delta-VN. Then, we adopt various techniques on
time series regression such as unit root test using both Augmented Dickey Fuller (ADF)
test and Phillips Peron (PP) test for stationary, co-integration test using Engle &Granger
approach and Johansen approach for examining the existence of a long-run relationship
between two variables, Granger Causality test for checking the existence and direction
of causality relationship between them, error correction models for investigating the
existence of short-term relationship. Moreover, we also apply Serial Correlation LM
test, Heteroskedasticity ARCH test, Histogram Normality test to check the
appropriateness of the estimated model. The research findings show that there is an
unilateral effect from FPI flows on Vietnam stock returns. The thesis also illustrates an
existence of a long-run impact between them when an increase in FPI flows can lead to
86% of increase in Vietnam equity returns. On the other hand, there is also a short-run
impact from FPI on VSM which would be decreasing gradually since the third month.

TABLE OF CONTENTS
CHAPTER 1. INTRODUCTION....................................................................................................... !
1.1 Problem statement1
1.2 Research objectives............................................................................................................................... 4
1.3 Research questions................................................................................................................................ 4
1.4 Research scope....................................................................................................................................... 4
1.5 Structure of the thesis........................................................................................................................... 5

CHAPTER 2. LITERATURE REVIEW........................................................................................ 6
2.1 The role ofFPI on economic development....................................................................................... 6
2.2 The role of Vietnam Stock Market..................................................................................................... 7
2.3 Theoretical framework......................................................................................................................... 8
2.3.1Foreign Portfolio Investment and stock market.............................................................. 9
2.3.2 Conceptual framework...................................................................................................... 11
2.4 Empirical studies.................................................................................................................................. 13
2.5 Suggested research model................................................................................................................. 15
2.6 Chapter remark..................................................................................................................................... 16

CHAPTER3. RESEARCH METHODOLOGY&DATA COLLECTION...................... 17
3 .1 Econometric techniques.................................................................................................................... 17
3 .1.1 Stationary and unit root tests........................................................................................ 17
3 .1.2 Co integration................................................................................................................... 18
3 .1.3 Granger Causality tests.................................................................................................. 18
3.1.4Error correction mechanism............................................................................................ 19

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3.2 Data collection..................................................................................................................................... 20
3 .3 Data analysis........................................................................................................................................ 22

3.3.1 Dependent variable: Delta-VN.................................................................................... 22


3.3.2 Independent variable: FPI............................................................................................... 23
3.3.3 Interaction between FPI flows and VN-Index........................................................... 23
13.3 Chapter remark................................................................................................................................... 33

CHAPTER 4. EMPIRICAL ANALYSIS...................................................................................... 35
4.1 Structural Break Point test................................................................................................................. 35
4.2 Unit root test......................................................................................................................................... 35
4.3 Co-integration test............................................................................................................................... 36
4.4 Granger Causality test......................................................................................................................... 38
4.5 Error Correction Model..................................................................................................................... 39
4.6 Chapter remark..................................................................................................................................... 38

CHAPTER 5. CONCLUSION AND POLICY RECOMMENDATIONS....................... 43
5.1 Main findings....................................................................................................................................... 4 3
5.2 Policy recommendation..................................................................................................................... 44
5.3 Research limitation and suggestion for further study................................................................ .45

REFERENCES........................................................................................................................................ 46
APPENDIX A.

DESCRIPTIVE STATISTIC.......................................................................... 49


LIST OF GRAPHS
Graph 3.3-1: Delta-VN=log(VN-IndexJVN-Index(-1))............................................................... 22
I

Graph 3.3-2: Foreign portfolio investment flows (FPI) to Vietnam from July 2000
to June 2012............................................................................................................................................... 23
Graph 3.3-3: FPI&VN-Index from July 2000 to June 2012........................................................ 24

LIST OF TABLES
Table 4.1-1: Summary of structural breakpoint test....................................................................... 35
'fable 4.2-1: Summary of unit root test results................................................................................. 36
Table 4.3-1: Summary of unit root test results for residuals using ADF&PP test:
Engle &Granger test................................................................................................................................. 36
Table 4.3-2: Summary of Johansen cointegration tes~··················································· 37

Table 4.3-3: Summary of Trace Statistic value................................................................................ 38
Table 4.4-1: Summary of Granger Causality test............................................................................ 38
Table 4.5-1: Summary of testing Vector Error Correction Model.............................................. 39
Table 4.5-2: Summary of the tests for approriateness of the estimated model .......................41


LIST OF FIGURES
Figure A-1: Structural Breakpoint Test for Delta-VN variable

49

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figure A-2: Structural Breakpoint Test for fPI variable.................................................................. 49
figure A-3: Unit root test for Delta-VN variable.............................................................................. 50
figure A-4: Unit root test for FPI variable.......................................................................................... 52
figure A-5: Cointegration test (Engle &Granger method) for residuals from the
linear regression for two variables....................................................................................................... 54
figure A-6: Results of the Johansen Cointegration test for model2 ............................................ 55

figure A-7: Results of the Johansen Cointegration test for model3 ........................................... 57
Figure A-8: Results of the Johansen Cointegration test for model4 .......................................... 58
Figure A-9: Results of the Granger Causality test........................................................................... 59
figure A-1 0: Results of the Vector Error Correction Model........................................................ 60
Figure A-ll: Results of the Wald test.................................................................................................... 61
Figure A-12: Results of the Serial Correlation test......................................................................... 61
Figure A-13: Results of the Heteroscedastiscity test...................................................................... 63
. Figure A-14: Results of the Histogram Normality test.................................................................. 64

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CHAPTER 1: INTRODUCTION
I

This chapter will introduce the thesis topic and identify the problems going to be
analyzed in the thesis. It gives the research objectives, research questions and research
scope. This chapter also provides the structure of thesis.

1.1

After the official joint to the World Trade Organiz

has been opening the financial market, economy a

advantages of lower production cost and investme

Asian countries, Vietnam has become an attractive

Vietnam is making a good impression on inter

expanding rapidly in emerging market and obta

•

global
policies on foreign investment restrictions in the stock market, Vietnam has further

•

enhanced attraction to international equity investor
About the regulations on foreign share holding

percentage of foreign holding rate from 30% up t

rather suitable for Vietnam Stock Market (VSM) in

About the regulations on profit transferring outflow

investors we have offered duty-free on this kin
Vietnamese foreigners and foreign residents.

On July 28, 2012 Vietnam stock market (VSM)

notable achievements when it reached more than 1.

1,690 public companies, 105 securities compan

companies and 23 stock investment funds. Mark

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27% of GDP.

Till May 31, total loans for securities of whole banking systems

were about 12 trillion VND, bad debt at 485 billion VND.
I

The July average trading volume reached 41.83 million shares per session with the
average value of 626.3 billion VND (down 3 7% in volume and -43,9% in value
I

frbm June). On July, VN-Index ended at 414.5 points, down 10.9 points from June (see
Economic Financial report Jul2012).
Additionally, foreign investors' transactions were still remammg gloomy. On Hose,
they bought 56.4 million shares valued at 1,377 trillion VND and sold 50 million
shares valued at 1,292 trillion VND. Net purchase value in July was 86 billion VND
while in June, foreign investors posted net sale of 650 billion VND. On HNX, foreign
players also posted net purchase of nearly 60 billion VND. (See Economic Financial
report Jul 20 12)
In fact, FPI flows into Vietnam have been increasing rapidly in recent years.
Especially, since Vietnam officially joined WTO in 2007, FPI flows have increased
strongly, accounting for more than 50% of total foreign investment capitals. In the
2008 global financial crisis, the FPI flowed out; the stock market fell 66%, from 921
points to 316 points and caused bad effects on macro economy. Then, along with the
economic recovery, the stock market witnessed a net inflow of FPI capitals but the
stock market rarely crossed 500 points, with mini-recoveries inevitably followed by
lengthy slumps. On theory, FPI flows can benefit an economy in three broad ways.

First, FPI inflows can provide a non-debt capital source of foreign investment for a
developing country and supplement domestic savings for improving the investment
rate. Moreover, FPI also reduces the pressure of foreign exchange gap for the lessdeveloping countries. Second, rises in foreign capital inflows can increase the
allocated efficiency of capital in a country. Therefore, FPI can induce financial
resources to flow from capital-abundant countries to capital-scarce ones.
Consequently, resource flows into the capital-scarce countries reduce their capital cost,
increase investment and raise output. Third, through its various linkage effects via the
domestic capital market, FPI

2


affects the economy by giving an upward thrust to the domestic stock market prices,
impacting on the price-earning (PIE) ratios of the firms and making these ratios
become higher which lead to a lower cost of finance and in tum attract a

..

higher amount of investment. Consequently, the lower cost of capitals can encourage
new equity issues with higher premium. On the other hand, FPI flows also stimulate
the domestic stock market's development when it opens the entry for foreign investors
In Resolution No.01/NQ-CP dated March 01, 2012 on key solutions to realize the
socio-economic development plan and state budgeting for 2012, the main targets for
economic development in 2012 have been set up such as about 6% to 6.5 %in the
GDP growth rate, 13% in total export growth , import surplus accounted for 11%
-12% of total export turnover , controlling trade deficit under 10%, the overspending
in state budget controlled less than 4.8% of GDP, total capitals invested in social
development accounting for 33.5% of GDP, the expansion in the consumer price index
less than 10%, 1.6 million employed workers, the urban unemployment rate remaining
at 4%.

So, they aim to these objectives: prioritizing curbing inflation by applying tight,
cautious and flexible monetary policy in accordance with the tight and effective fiscal
policy, stabilizing the macro-economy, maintaining growth rate at a reasonable level
by reinforcing the inspection of market and prices, well-organizing the domestic
market, encouraging exports, controlling imports and reducing trade deficit. On the
other hand, they also object to growth model renovation, the national economy
restructure and improvement in the quality performance and competitiveness of the
national economy and enhancement in the performance of external relations and
international integration by these solutions: restructuring investments focused on
public investments, restructuring the financial and banking system, especially on
commercial banks, restructuring enterprises focused on SOEs.

3


Despite a huge amount of empirical researches on stock market behaviors, most

•

~tudies

have focused on the major well- established markets or on the other macro

factors' influences on stock markets. Thus, an increased knowledge of how foreign
portfolio investments influence on Vietnam stock market (VSM) is a practical
interest to investors and financial researchers.
Therefore, finding the impacts of FPI flows on Vietnam Stock Market, especially in
the long-run, will help policy makers improve policies to attract more FPI flows and
achieve national economic objectives.

1.2 Research objectives
The thesis' objectives include:
...

•

To examine the impacts ofFPI on Vietnam Stock Market (VSM).

•

To recommend general policies for sustainable development in VSM to

encourage more FPI flows into Vietnam .

1.3 Research questions
The thesis aims to answer the following questions:
•

Is there a long-run or short-run impact ofFPI flows on VSM?

•

Is it correct to say that VSM takes time to be fully adjusted after

any changes in FPI flows? So how long does it take for the change to
take effect?
i

1.4 Research scope
The research focuses on finding the impacts of FPI flows on Vietnam Stock Market.

So we only investigate monthly time series data of net FPI flows and VN-Index from
July 2000 to June 2012.

4


1.5 Structure of the thesis
I

1fhis thesis has five chapters which are organized as follows:
I

• Chapter 1 explains reasons why to choose this topic for research, the
research's significance, main objectives, some research questions and the scope
of the research.
• Chapter 2 provides an overview on theoretical background of FPI impacts on
VSM which are expressed in general through the conceptual framework.
•

Chapter 3 presents the research methodology. Based on the other empirical

researches, we draw out the study framework. This chapter also describes the
general econometric models, variables, data collection which are explained the
reasons for choosing variables included and reliable sources to collect data.
•

Chapter 4 shows the statistic results from adopting the econometric model

above. Findings are analyzed to answer the research questions in the chapter 1.
•

Chapter 5 obtains the main findings and recommends sustainable policies to

improve VSM in order to encourage FPI flows.

5


CHAPTER 2: LITERATURE REVIEW
the main purpose of this chapter is to review theoretical and empirical literature for
the links among FPI & VSM. This chapter is divided into five main parts. The first
and second parts contain the concepts and the roles of FPI & VSM to economic
growth. The third part, theoretical frameworks include some theories about the
relationship between FPI and stock market, conceptual framework. The fourth part
presents empirical studies about the impacts from FPI flows on stock market in
detail. The final part suggests the research model.

2.1 The role of FPI on economic development.
~apital flows

including short-term portfolio flows and long-term investments have

.related to economic development and even to infrastructure development. To boost
1

•

economic growth and expand resources for development finance, governments usually

promote international capital inflows, strengthen capital markets in order to encourage

efficient financial markets. According to Bakardzhieva et al (2000), capital flows were
clarified into several types. "Three distinctive flows appear in the financial account of
balance of payments, namely foreign direct investments (FDI), portfolio investments
and other investments". In this paper, we just focus on portfolio investments into the
Vietnam stock market. These flows are referred as the foreign portfolio flows (FPI) in
Vietnam.

Foreign Portfolio Investment (FPI) represents passive holdings of securities such as
foreign stocks, bonds or other financial assets, none of which entails active
management or control of the securities' issuers by the foreign investors. However,
they can sell off easily the securities and pull out the portfolio investment.
Therefore, FPI is much more volatile than FDI. For developing countries, FPI can
bring rapid development, helping an emerging economic opportunity, job creations,

6


and significant wealth. When an economic takes a downturn, or fails to meet the
expectations of international investors, the huge capital inflows can be withdrawn
grammatically. According to World Bank (2001), the external problem of excessive
capital outflows were as follows: the capital outflows above critical threshold levels
might impact adversely on the domestic economy by draining foreign exchange
reserves, reducing the resources available for domestic investment, and slowing the
developing of the financial sector. However, the World Bank (2001) report also
found that there was an existence of a strong relationship between FPI with
domestic investment. In the other word, in a research on some East Asia economies
during 1990s of Henry (2000), stock market liberalization on trading might lead to
investment booms. But, capital inflows might not lead to economic growth because
it occurs in conjunction with a set of domestic complementarities for capital
absorption, retentive capabilities, and consequent impact on production and

consumption. In fact, global financial integration only allows greater ease in the
entry and exit of capital. _

2.2 The role of Vietnam stock market (VSM).
The State Securities Commission, part of the Ministry of Finance, has been
managing the Vietnam stock market. They have issued a Law on Securities in June
2006 to facilitate the development of the securities market speedily and sustainably
by covering the regulation of listing and trading securities, the State's roles in
administering and inspecting the securities market. There are two stock exchanges
in Vietnam, one in Hanoi and one in Ho Chi Minh City. The Ho Chi Minh stock
exchange was inaugurated in July 2000 and became a main Vietnam stock exchange
with approximately 280 companies listed. We use the measure of VSM expressed as
VN-Index quoted in the Ho Chi Minh stock exchange. It is a capitalization-weighted
index of all the companies listed on the Ho Chi Minh Stock Exchange. The index
was created with a base index value of 100 as of July 2000. In order to

7


estimate the growth rate of VN-Index, we take the logarithm of VN-Index over lag one
ofVN-Index and named this variable as Delta-VN.
Stock markets bring benefits to corporations, individual investors and governments.
'

For corporations, by making an Initial Public Offering (IPO) on the stock exchange, a
corporation can gain access to a huge amount of investors, raise capitals by attracting
abundant capital resources for their business. Moreover, access to the stock markets also
facilitates growth by merger or acquisition through share purchases. For investors, stock
markets are able to help them improve returns by diversifYing their choices of different
corporations and industries to invest. Equities cannot ensure a fixed rate of return. Thus,

they become a riskier investment than money markets or bonds. What equities provide
is the prospect of a combination of income and capital gains, plus a superior rate of
return. For the economy, stock markets can put people's savings to work, the economy
cannot get benefits or just a little from individual cash savings or bank accounts. Stock
investment is a direct method in the success of businesses and helps promote stronger
economic growth. In the other word, stock markets are also a measure of the economy's
performance. In general, the performance of share prices is a good indicator of its
current condition and of the confidence of individuals within that economy. So, in some
extent, the performance of the stock market is correlated with the health of the
economy. Moreover, the strict regulations and requirements for corporation's stock to be
listed on the stock exchange and maintained on trading are a good way for investors to
ensure corporate governance because management standards and standards of record
keeping within that corporation are maintained at a high level. For governments, stock
markets can give access to funds because the stock exchange allows individuals to lend
money to their government when government may issue bonds quoted on the stock
market to raise money for infrastructure or major projects.

8


2.3 Theoretical frameworks
7here are many researches on the role of FPI flows through the stock market into
emerging market economies.

2.3.1 Foreign Portfolio and stock market.
Theoretically, many economists and researchers have the different viewpoints about
the relationship between FPI and stock returns in domestic economies.
The first theory is to support the unilaterally impacts from FPI flows on stock returns.
According to Clark and Berko (1997) who investigated the economically and
statistically significant positive correlation between monthly foreign purchases of

Mexican stocks and Mexican stock returns, a percent increase in foreign inflows led to
13 percent increase in Mexican stock prices. Additionally, Choe et al (1999), who
examined foreign investors' impacts on the Korean stock index from November 1996 to
the end of 1997, found evidences of foreign investors' positive trading and herding
before the Korea economic crisis. However, there was no evidence that the foreign
investors· transactions had a destabilizing impact on the Korean stock market during
their sample period. The Korean stock market was adjusted quickly and efficiently by
large sales of foreign investors. On the other hand, Bose and Condoo (2004), who
studied the impact ofthe FII policy reforms on FII portfolio flows to the Indian stock
market through a multivariate GARCH regression model, strongly suggested that
liberalization policies had had the desired expansionary effect and obtained a sensitive
impact of FII inflows to a change in BSE returns.

The second theory is to illustrate the viewpoint that there is no correlation between FPI
flows and stock returns. According to Singh and Weisse (1998) who examined two
major components of financial liberalization : stock market development and portfolio
capital flows in the scenarios of less developed countries (LDC), LDCs should pay
attention on strengthening their banking systems rather than stock

9


markets because their banks could promote long-term economic growth and
1

industrialization. Moreover, they were able to suffer the burden of globalization

1without speculative portfolio inflows. In addition, Pal (2006), who aimed to
1

examine the impact of Foreign Portfolio Investment on Indian economy through the

I

stock market, showed that the perceived benefits of foreign portfolio investment had
not been utilized in India. The prediction that the foreign portfolio investors would
boost economy through a country's stock market did not work in India.
The third theory is to demonstrate the impacts from stock returns on FPI flows.
According to Ko et al (2005) who investigated the characteristics of the stock
ownership by institutional and foreign investors in both Japan and Korea, foreign
investors had more advantages in preferences to large capitalization and low book-tomarket ratio stocks than institutional investors in both stock markets. Furthermore,
foreign investors prefered high-return stocks, especially in Korea. Moreover, the
preferred stocks of both institutional and foreign investors had statistically significant
positive abnormal profits in both markets while favored ones by either institutional or
foreign investors had statistically significant positive abnormal only in Korea. In other
word, Liljeblom, E. and Loflund, A. (2005), who investigated determinants of foreign
equity investment flows after the deregulation of Finnish stock market, indicated that
the Finish stocks owned by foreigners were found to deviate clearly from the Finnish
stock market. Portfolios of foreign investors were significantly titled to additional
withholding tax on low dividend-yield. Moreover, large- capitalization and liquidity
stocks were preferred with a record of strong profitability (measured by past ROI).
Additionally, Thapa and Poshakwale (2012), who found the answer for the question
whether national equity market characteristics explained specific differentiation in
distribution of foreign equity portfolios by using panel data of comprehensive foreign
portfolio holdings and different measures of national stock market factors for 36 host
countries, showed that foreign investors prefered larger and more visible developed
markets with higher liquidity, higher efficiency and lower transaction costs.

10

However, only a few studies like Froot et al (200 1) found a bilateral impact ,between
FPI flows and stock returns. They studied the behavior of international portfolio flows
I

and their relationship with equity returns by employing panel data of
1

44 countries and found that international portfolio flows were strongly influenced by

past returns while foreign portfolio inflows had positive impact for future equity
returns. Moreover, the sensitivity of local stock prices to foreign inflows was positive
and large.
Based on the reality scenario in Vietnam, we support the theory about the unilateral
impacts from FPI flows on the VSM.

2.3.2 Conceptual framework.

Through theoretical frameworks, we can present the impact of FPI flows on stock
market as follows:

FPiflows

Test the impacts of FPI flows on Vietnam stock market
(Delta-VN) in the long-run and short-run
There has been the growing role of foreign portfolio investment in international
financial markets over the last decade. The increased flows to securities investment
from industrialized countries to emerging markets are able to lead to possibility for
development in all involved countries. The percentage of FPI holding in a stock is an
important factor to analyze. When this rate increases, the stock price goes up and when

it drops, the share price comes down. If foreign investors invest in a company,

11


jt is the good signal for this company's growth rate
potential growth in the recipient. However, in case,
;;

tt means that this company's stock price is very volatile and risky because it's easier for
foreigners to move out of a stock. But no one can deny some positive impacts of FPI on
stock markets. First, foreign portfolio investors are professionals on stock markets. So,
they always purchase stocks on the basic of fundamentals. It means that they require
more information to evaluate. This leads to growing demands on companies to become
more transparent and more disclosure in order to be more attractive to investors. Thus it
helps reducing information asymmetric on stock markets. Second, the globalization on
stock markets require to reform securities trading and transaction systems, nurture
securities brokers and liquid markets. Third, the stock markets' openness for FPI makes
it more attractive to foreign capital either direct or indirect flows. Fourth, FPI inflows
boost financial innovation 'and development in trading instruments. Not only does it
enhance competition in
I

financial markets but also improves the alignment of asset prices to fundamentals.

:However, the other side of the coin is that there are some dangers if certain limits are
exceeded. First, FPI flows are free and unpredictable. Moreover, foreign investors
always look for profits. When FPI flows move investments, they are likely to cause
severe price fluctuations resulting in risky volatility. Second, increased holding rate
from overseas may lead to loss of control in domestic firms. Third, when FPI flows

into stock market in huge amounts, they can create great influence on the way the stock
market behaves, going up or down. Fourth, the effect ofFPI on the currency
appreciation may lead to the un-competitiveness in the export industries.
In this thesis, we aim to investigate the impacts of FPI flows on Vietnam Stock Market
(VSM) in the long run and the short run. Then, we make some recommendations on
policies for sustainable development in VSM to attract more FPI flows.

12


2.4 Empirical studies.

Recently, there have been a lot of researche

i•

flows and stock returns. By applying va

demonstrated the complementary impact o
Chakrabarti, R. (200 1) analyzed FII flows

economic variables including stock returns

monthly data from January 1993 to Decem
capitalization data and other financial data

rate in India, return on the MSCI world ind

country credit rating data. He arrived the co

while the flows were closely related to Idia

these returns rather than the cause of that. M

regime change in the determinants of FII flo

the sole driver of flows since the crisis. Mo

local investors, they did not face an informa

On the other hand, Mukherjee et al (2002) u

relationship of foreign institutional invest

market with its possible covariates for the p

first included variables reflecting daily mar
·

and international equity markets. The second were macro variables affecting

foreign investors' expectation about return in Indian equity market like exchange rate,
short-term interest rate and index of industrial production (liP). The data-set was
combined with day-to-day variations, thus, it was suitable to test various correlations,
including Granger causality for equity market operations. After relating daily FII
flows, they modified the model specification to include the variables' short-term past
history over different time frames, like a week or fortnight. Later, they tried to relate
FII flows to Indian macroeconomic indicators. Therefore, their results indicated that
FII flows in the Indian equity market had

13


tendency to be caused by stock market returns but not vice versa. It meant that
Indian equity return was the most important factor affecting the FII flows into India.
Moreover, while FII sale and FII net inflows were strongly affected by Indian stock
market's performance, this market performance did not cause FII purchase. In other
words, FII investors did not diversify their investments by Indian stock market.
Also, returns from exchange rate differentiation and the Indian economic
performance might have affected on FII inflows , but such effects did not seem to
be strong. Finally, FII flows were automatically daily correlated and this
correlation could not be calculated for the all.
In addition to the international evidences of the role of FPI on stock returns, there
are numerous evidences in a group of specific countries. Syriopoulos (20 10)
employed weekly stock index closing prices in the Balkan countries such as the
BET-C of Romania, SO FIX of Bulgaria, CROBEX of Croatia, ISE-1 00 of Turkey,
GR-GI of Greece, CYP-GI of Cyprus, S&P500 of the US and DAX of Germany
expanding from April 27, 1998 to September 10, 2007 to examine the risk and
I

:return of international portfolios allocated by investors to major Balkan equity
markets. They applied linear method like error-correction vector autoregressive
model and non-linear method like switching regime error correction model to test
for the potential linkages between Balkans and developed stock markets. The results
illustrated the presence of co-integration vectors indicating a stationary long-run
relationship among the Balkan equity markets. On the other hand, the Balkan equity
markets were affected by both domestic and external forces and shaped their longrun equilibrium path. However, inflows of international portfolio investments and
trading activity in the Balkan equity markets were growing rapidly.
Saxena and Bhadauriya (20 11) collected daily data series on Fils inflows and S&P
CNX NIFTY computed by logarithmic returns on daily closing prices for 7

financial years from April 2003 to March 2010 to explore the causal relationship
between FII inflows and volatility in indices of NSE by adopting unit root test,
Granger Causality test in a hi-variable VAR framework and vector auto regression.

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For applying the test, they had to convert all variables into a stationary process before
including them into a VAR system. In order to test the variables' stationary, they used
Augmented Dickey Fuller test and Phillip Peron test. They aimed to find the answer for
the question that whether movements in Fil inflows had an effect on stock market
returns or movements in stock market returns had an effect on direction of Fil inflows
in India and got the results that there was no bidirectional causal relationship between
stock market volatility and Fil inflows. They found that stock market volatility was a
cause to foreign institutional investment inflows and the trends of foreign institutional
investment inflows did not have that much impact on stock market volatility. Also, they
found that the past data of stock market returns could forecast the present and future
trend of foreign institutional investment inflows to India.
The most recent research is Kumar et al (2012) who studied empirically dynamic
interaction between Foreign Institutional Investor (Fil) flows and Indian stock market
returns through aggregate daily Fil data comprising three components purchases, sales
and net purchases along with the S&P CNX Nifty market index taken by the log
difference from 7th January 2000 to 6 1h August 2009 using ordinary least square
regression , vector auto regression and impulse response function along
. with Granger Causality test to illustrate a sharp and significant impacts between Fil
flows and Indian equity market returns. The results showed strong evidence of
. positive feedback trading of Fils with an adjusted R square of eleven percent. Also. the
Granger Causality test led to rejection of both null hypothesis lending strong support to
a bidirectional relation between Fils and equity market returns in India. But, the overall
response function of institutional investors to a one standard error shock revealed a

sharp and significant impacts dying out in four to five days.
2.5 Suggested

research model

Theoretical framework shows that there are strong impacts from FPI flows on stock
returns. As a paper of Saxena and Bhadauriya (20 11) and Syriopoulos (20 10), we

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adopt unit root test, co-integration test, Granger Causality test and vector error

~orrection

model to study the impact of FPI flows on Vietnam stock market. Due to 6ur support to
the theory of unilateral impacts from FPI flows on stock returns, we
I

prefer Delta-VN as dependent variable and FPI as

independent variable in our

I

model in order to estimate the role of FPI flows on the VSM.
Therefore, our suggested general model for this thesis is as follow:
Delta-VN = f (FPI)

~.6 Chapter

remark

In summary, most studies employ daily data to investigate the relationship between FPI
flows and stock market returns. However, we shall expand the data into monthly data
like the study of Chakrabarti (200 1) to get a general view about the 'impacts from FPI
flows on stock returns in month by month. Moreover, we shall learn the methods of
Saxena and Bhadauriya (20 11) in testing time series data such ,as unit root test using
both Augmented Dickey Fuller (ADF) test and Phillip Peron
(PP) test, Granger Causality test in a hi-variable VAR framework. Additionally, we
also extend to co-integration test on these monthly data to examine a long-term
relationship between them. In other words, we shall adopt a lesson from Syriopoulos
(20 10) in using error correction model to investigate a short-run relationship between
two variables. Finally, we infer a general model for this thesis.

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