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FOREIGN TRADE UNIVERSITYHO CHI MINH CAMPUSECONOMETRICSTOPIC: MONETARY POLICY ANDSTOCK PRICE/ VIETNAM STOCKMARKETGroup 8Name and student’s ID:1. Lục Huệ Tâm – 20111165522. Bùi Hà Nhi – 20111165013. Văn Hạnh Nhân – 20111164984. Nguyễn Khánh Toàn – 20111156085. Trần Đinh Vũ – 20111166276. Nguyễn Ngọc Y...

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FOREIGN TRADE UNIVERSITY HO CHI MINH CAMPUS

ECONOMETRICS TOPIC: MONETARY POLICY AND STOCK PRICE/ VIETNAM STOCK MARKET Group 8 Name and student’s ID: 1. Lục Huệ Tâm – 2011116552 2. Bùi Hà Nhi – 2011116501 3. Văn Hạnh Nhân – 2011116498 4. Nguyễn Khánh Toàn – 2011115608 5. Trần Đinh Vũ – 2011116627 6. Nguyễn Ngọc Yến Nhi - 2011116510 Class: K59CLC6 Class code: 73 Instructor: Lê Hằng Mỹ Hạnh

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Table of Contents Table of figure.................................................................................................................... a Chapter 1. INTRODUCTION.........................................................................................1 1.1

Rationale of the study.........................................................................................1

1.2

Aims and objectives of the study........................................................................1

1.3

Research subject:................................................................................................1

1.4

Research question:..............................................................................................2

1.5

Research structure:.............................................................................................2

Chapter 2. LITERATURE REVIEW...............................................................................2 2.1

Relationship between Monetary policy and Stock market in the world:.............2

2.2

Relationship between Monetary policy and Stock market in Vietnam:..............4

Chapter 3. DATA AND METHODOLGY.......................................................................6 3.1

Regression model:..............................................................................................6

3.2

Variable definition and expectation....................................................................7

Chapter 4. RESULTS AND ANALYSIS.......................................................................10 4.1

Test for multicollinearity..................................................................................10

4.2

Test for heteroskedasticity................................................................................11

4.3

Regression model results:.................................................................................12

4.3.1 One variable.................................................................................................12 4.3.2 Two variables:..............................................................................................12 4.3.2.1 LINF and LM2......................................................................................13 4.3.2.2 LINF and LSTI......................................................................................13 4.3.3 Three variables:............................................................................................14 Chapter 5. CONCLUSION............................................................................................15

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Table of figure Figure 3-1 sum LNVI LINF LSTI LM2...........................................................................10 Figure 4-1 correlate LVN LINF LSTI LM2.....................................................................11 Figure 4-2 reg luhatsq LM2..............................................................................................11 Figure 4-3 reg LVNT LINF..............................................................................................12 Figure 4-4 reg LVNI LINF LM2......................................................................................13 Figure 4-5 reg LVNI LINF LSTI......................................................................................14 Figure 4-6 reg LVNI LINF LM2 LSTI.............................................................................14

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Chapter 1.

INTRODUCTION

1.1 Rationale of the study Monetary policy is the practice of stabilizing the currency through the use of credit and foreign exchange transactions, consequently stabilizing the economy and supporting growth and development. The central bank is the body in charge of carrying out monetary policy. Price stability, GDP growth, and unemployment reduction are the goals of monetary policy. Monetary policy becomes an effective economic stabilizing instrument for the government since it has the potential to alter the money market, consequently affecting aggregate demand and output. The stock market, often known as the stock exchange, is a venue where investors can issue, buy, sell, and exchange various types of securities. This is typically done at the stock exchange or through securities brokerage firms. Nowadays, the relationship between money policy and the stock market has been researched deeply by many investors and researchers. Moreover, stock prices are assumed to be controlled by a variety of macroeconomic variables such as interest rates, inflation, and money supply, all of which are influenced by various economic policies. The central bank must figure out how monetary variables like inflation, money supply, and interest rates affect stock market performance. Therefore, in this research, we will focus on analyzing the relationship between these two main factors: money policy and stock market. 1.2 Aims and objectives of the study The purpose of this study is to define the connection between monetary policy variables and stock prices on the Vietnamese stock market using an OLS linear regression model to analyze the impact of stock price fluctuations.

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Group 8 1.3 Research subject:

Monetary policy, stock price and stock market in Vietnam as well as the relationship of factors derived from monetary policy and stock prices on the Vietnamese stock market based on the use of OLS linear regression model. 1.4 Research question: This research will focus on answering the main question: How will the variables in the model affect the general stock market of Vietnam with other variables related to monetary policy? 1.5 Research structure: The research is included 5 main chapters: Chapter 1: Introduction - A brief statement about the purpose of the study Chapter 2: Literature review - Analysis of some relevant published literature Chapter 3: Methodology and data - Introduction of the model and description of data Chapter 4: Results - Estimation results are provided in a table and discussed in this section. Chapter 5: Conclusions

Chapter 2. LITERATURE REVIEW 2.1 Relationship between Monetary policy and Stock market in the world: The relationship between monetary policy and the stock market performance has been a subject of interest among economists and policymakers over a long period of time. The existing literature provides a number of theories demonstrating the relation between stock market and economic activity proxied by different macroeconomic variables. On the basis of some asset price channels of the monetary policy transmission mechanism, it is generally agreed that restrictive monetary policy leads to lower stock prices and 2

Group 8 expansionary monetary policy leads to higher stock prices. Through monetary policy, the Central bank not only influences interest rates but also inflation expectations. An unanticipated rise in inflation may lead to a decline in stock prices, as expectations of more restrictive monetary policy will increase. To determine the effect of monetary policy on stock and bond return, Booth and Booth used two variables of monetary policy. The findings of their study show that a decrease in monthly return of both large and small bond and stock portfolios is associated with a restrictive monetary policy. Using monthly data from 1971 to 1990, Mukherjee and Naka studied the association between stock prices and macroeconomic variables including money supply, inflation, index of industrial production, exchange rate and interest rates in Tokyo Stock market. Patelis examines whether some portion of the observed predictability is in excess. US stock returns can be attributed to shifts in the monetary policy stance. He finds that monetary policy variables are significant predictors of future returns, although they cannot account fully for the observed stock return predictability. Patelis’ explanation for the finding that monetary policy indicators are significant predictors of excess stock returns relates to the financial propagation mechanism and to the credit channel of monetary policy transmission. Jensen and Johnson also find that monetary policy developments are associated with patterns in stock returns. This argument is based on Waud’s suggestion that discount rate changes affect market participants’ expectations about monetary policy. Since rate changes are made only at substantial intervals, they represent a somewhat discontinuous instrument of monetary policy, and they are established by a public body perceived as being competent in judging the economy’s cash and credit needs. French analysis by suggesting that the monetary environment affects investors’ behaviour. The monetary policy stance is proxied by a binary dummy variable indicating discount rate changes. find that predictable variation in stock returns depends on monetary as well as business conditions, with expected stock returns being higher in tight 3

Group 8 money periods than in easy money periods. They find that stock returns in twelve OECD countries over the period 1956-1995 are generally higher in the expansive US and local monetary environments than they are in restrictive environments. 2.2 Relationship between Monetary policy and Stock market in Vietnam: For some brief on Vietnam’s monetary policy: in the late 1980s, following Doi Moi policy, Vietnam shifted from a centralized economy controlled by the government to a more open market economy with a “socialist orientation”. The new policy encouraged and gave incentives to private businesses and overseas investment, including foreignowned enterprises. Over 30,000 private businesses had been established by the late 1990s and there were apparent improvements in agriculture reforms. The strategy has proven a success as real GDP grew at an average rate of 7.4% from 1991 to 2010, and per capita real GDP almost doubled from 1993 to 2009. The growth was driven by domestic investment, foreign investment and exports. The poverty rate also witnessed a decline during the past two decades (World Bank). Vietnam is expected to grow as one of the important industrial economies by 2025 as the country embraces a recent healthy growth path, a young and educated working population, rich natural resources and its willingness to develop and internationalize. During the period 2000–to 2015, Vietnam's economy witnessed many strong movements, especially the impact of the crisis in the region and the world. This required the Government to adopt flexible, effective macroeconomic policies in a timely manner to help the national economy overcome difficulties and achieve the targets of growth in each period. As a result, the economic growth rate decreased from 8.48% to 6.31%. Besides, the prioritized target in this period was to control inflation – a consequence of the increase in aggregate demand in the previous period. The period 2010–2012 witnessed fluctuations in the stock price Vietnam index due to the situation in the country and internationally, such as the European debt crisis or high inflation, unstable exchange rates... However, the stock market began to recover 4

Group 8 powerfully in 2013 when the inflation rate was controlled, interest rates were reduced, foreign reserves increased and the deployment of securities tax-deductible transfer solutions. So, 2013 can be considered as an establishment for the stabilization of the market in 2014. However, many market sessions still declined due to the impact of events in the South. In 2015, the macroeconomic condition was more positive; however, the stock market experienced a fluctuation, the growth of the Index was 5% due to the influence of external factors, the strongest ones were the exchange rate fluctuations and the fall in oil prices. Besides those changes, the undeniable growth of Vietnam's stock market after more than 15 years of operation made remarkable progress with a market capitalization of over 1.3 million billion dongs, equivalent to 34% of GDP with average trading per session reaching 4.964 billion with 682 stocks listed on the two trading centers. Studies have shown that interest has an opposite impact on the stock price. At the second rank, exchange rate policy can help investors to forecast the market change through the exchange rate policies of central banks. Some studies also examined the impact of the money supply on the stock price, it showed a positive relationship between the money supply and the US stock market. Existing research into the determinants of volatility of stock exchange highlights such factors of monetary policy as interest rate, required reserves, money supply, exchange rate, etc. It appears that a frequently applied method to determine the relationship between monetary policy and the stock market is the vector autoregressive model, as in Liljeblom and Stenius, Zakaria and Shamsuddin, and Hussin et al. Using VAR, similarly, Al-Raimony and El-Nader identify the cause of Jordan’s market volatility between 1991 and 2010. Accordingly, volatility has been a subject of existing research, yet the study of conditional volatility has been attracting the attention of many researchers, especially when the world economy experienced wide upheavals. Thus, the investigation into stock

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Group 8 market volatility and its determinants is crucial in controlling market risks and contributes to economic stability and sustainable development.

Chapter 3. DATA AND METHODOLGY 3.1 Regression model: The goal of this research is to establish the relationship of factors derived from monetary policy and stock prices on the Vietnamese stock market based on the use of OLS linear regression model to analyze the impact of changes in stock prices. How will the variables in the model affect the general stock market of Vietnam with other variables related to monetary policy? The data sources used were all provided by verified sources and reviewed by the research team. The time period included in the study was taken from January 2018 to April 2021 by the research team and includes data related to the variables used in the paper. Our research model is based on DewanMuktadir-Al-Mukit and A.Z.M. Shafiullah (2012) research from Dhaka, Bangladesh (2012). The original regression model is achieved with OLS, consists of 4 dependent variable which are monthly Inflation rate (INF), Broad money supply (M2), Treasury bill (Tbill) and Repo rate (REPO), while the dependent variable Y is DSGEN (Dhaka general index), with the purpose of indicate the overall situation of the stock market at Dhaka. But due to the lack of information on the REPO rate in the Vietnam market (information security or scarcity in information resources), we decided to deduct this variable from the model. As for treasury bills, the main purpose of this is to act as a proxy of short term interest rate, so we instead use the variable “short-term interest rate”. The Sample regression function that we inherit from structural models of empirical researches will choose VN-Index as independent variable (Y = VNI) and 3 dependent variables (INF, M2 , STI) VNI= β1 + β2INF + β3M2 + β4STI + Ui (PRF) 6

Group 8 VNI  = β 1 + β 2INF  + β 3M2  + β 4STI+U  i (SRF) In the PRF model, β1 is the intercept of the model which helps the model to operate functionally, but has no economic meaning. β2, β3, β4 are the parameters indicating the slope of coefficients of variables VNI, M2 and STI. Ui is the stochastic error. And for the SRF, we have all estimators of coefficients of the previous PRF model. And according to empirical research ( DewanMuktadir-Al-Mukit and A.Z.M. Shafiullah (2012) ), we will also transform log our model to smoothen out the data and to reduce heteroskedasticity: LVNI  = β 1 + β 2LINF  + β 3LM2  + β 4LSTI+U  i 3.2

Variable definition and expectation

In this part, we will go into description of each variable in the model and our expected impact of the dependent variables to the independent variable. The table 3.1 will include the variable full name, unit scale, symbol, explanation and the web source of each observation: Variable

Symbol

Explanation

Source

VN-Index

VNI

VnIndex shows stock price fluctuations traded at

Cafef.vn

Ho Chi Minh City Stock Exchange. Good

Unit: Point

Inflation rate of

indication for overall vietnam stock market INF

The inflation rate is the percentage change in the tradingeconomic

Vietnam

price index for a given period compared to the s.com

(monthly)

previous period. This will help alert fluctuation in overall price, specifically stock price in this

Unit: %

research. Broad money

M2

Broad money supply is the quantity of money

ceicdata.com 7

Group 8 supply M2

available circulating in an economy controlled by

Vietnam

monetary policies. This quantity includes all

(monthly)

cash, checking deposits, savings deposits and other money market securities

Unit: $ Vietnam Short-

STI

Interest rates on loan contracts or debt

term interest

instruments with maturities of less than one year,

rate(monthly)

such as treasury bills, bank certificates of deposit,

ceicdata.com

or commercial paper

Unit:%

Table 1 : Summary of variables And before we go into the results of the research, we will first summarize the expected impact of each variable to have a bigger scope of comparison to the past researches. In table 3.2, we will go over the sign of impact (positive or negative) and provide empirical research or past reports that encourage or against the signs of the coefficients. Please take note that this is just a speculation of the effect of the impact and it will only concern the signs of the effect, not the mass of significance yet. Variable

Expected effect to VNI Past research

INF

+/-

Dinh Tran Ngoc Huy, Pham Minh Dat and Pham Tuan Anh (2020) Phan Thi Bich Nguyet and Pham Duong Phuong Thao (2013)

M2

+/-

- Sara Alatiqi and Shokoofeh Fazel (JOURNAL FOR ECONOMIC EDUCATORS, 8(2), FALL 2008)

STI

-

- Nguyen Hoang Lan (2015) Table 2 : Expected Impact of dependent variables 8

Group 8 Inflation rate can immediately have a negative impact on the stock market because when the inflation rate increases, the input costs of business will rise. Moreover, inflation also affects behaviors of investors as well as the investment value in the stock market. In the long term, inflation may have a positive effect according to Phan Thi Bich Nguyet and Pham Duong Phuong Thao (2013). However, the data is usually really low which makes it hard to depict the precise impact of inflation rate on the stock market. Money supply M2 can have either a positive or negative impact on the stock market. In most cases, because Money supply and interest rate have a negative relation between each other and interest rate with stock price also have negative relations, so people biasly accept that if there is an increase in money supply then it will positively affect ...