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The Case of the Vietnamese Stock Market Loc Dong Truong, Ger Lanjouw, Robert Lensink

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The Case of the Vietnamese Stock Market Loc Dong Truong, Ger Lanjouw, Robert Lensink Stock-Market Efficiency in Thin-Trading Markets: The Case of the Vietnamese Stock Market Loc Dong Truong, Ger Lanjouw, Robert Lensink To cite this version: Loc Dong Truong, Ger Lanjouw, Robert Lensink. Stock-Market Efficiency in Thin-Trading Markets: The Case of the Vietnamese Stock Market. Applied Economics, Taylor & Francis (Routledge), 2008, 42 (27), pp.3519. 10.1080/00036840802167350. hal-00582179 HAL Id: hal-00582179 https://hal.archives-ouvertes.fr/hal-00582179 Submitted on 1 Apr 2011 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. Submitted Manuscript For Peer Review Stock-Market Efficiency in Thin-Trading Markets: The Case of the Vietnamese Stock Market Journal: Applied Economics Manuscript ID: APE-06-0595 Journal Selection: Applied Economics G14 - Information and Market Efficiency|Event Studies < G1 - General Financial Markets < G - Financial Economics, P34 - JEL Code: Financial Economics < P3 - Socialist Institutions and Their Transitions < P - Economic Systems Keywords: stock-market efficiency, thin-trading stock markets, Vietnam Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Page 1 of 35 Submitted Manuscript 1 2 3 4 5 6 7 8 9 10 11 Stock -Market E fficiency in Thin -Trading Markets 12 13 14 The Case of the Vietnamese Stock Market 15 16 17 Short title: Stock -Market Efficiency in Vietnam 18 19 20 For Peer Review 21 Truong Dong Loc, Ger Lanjouw and Robert Lensink* 22 23 24 25 26 Abstract 27 This paper reviews developments in the Stock Trading Cen tre (STC) in Ho Chi Minh City, 28 29 Vietnam, the main stock market in the country, since its start in 2000. It presents information 30 about developments in the number of stocks traded, trading activity and stock -price 31 developments. The article focuses on the ques tion whether the market is weak-form efficient. 32 An important element of the investigation concerns the possible bias of the results caused by 33 the thin trading that characterizes the STC. Stock -market returns are corrected for this. The 34 main conclusion is that the STC is not efficient in the weak form. 35 36 37 38 Keywords: stock -market efficien cy, thin -trading stock markets, Vietnam 39 40 41 42 43 JEL -codes:G14, P34 44 45 46 47 48 49 50 51 52 53 54 55 56 * Truong Dong Loc is at the School of Economics and Business Administration (SEBA), Can Tho University, 57 Vietn am. Ger Lanjouw is at the Department of International Economics and Business, Faculty of Economics, 58 University of Groningen, The Netherlands. Robert Lensink is at the Department of Finance and Accounting, 59 Faculty of Economics, University of Groningen, The Netherlands and external CREDIT fellow, Department of Economics, University of Nottingham, UK. Corresponding author: Ger Lanjouw, Department of International 60 Economics and Business, University of Groningen, P.O. Box 800, 9700 AV Groningen, The Netherlands, phone +31 50 3633713, fax +31 50 3637337, email [email protected] . Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript Page 2 of 35 1 2 3 4 5 1. Introduction 6 7 A growing number of papers examine whether stock markets in emerging markets behave in 8 9 line with the efficient-market hypothesis (EMH). Some of these studies reject the hypothesis 10 11 1 12 that the stock markets in question are weak -form efficient . For instance, Wheeler et al. 13 14 (2002) fail to find support for weak -form efficiency in the case of the Warsaw Stock 15 16 Exchange. Similarly, Grieb an d Reyes (1999) reject the hypothesis of market efficiency f or all 17 18 19 stock - market indexes and most individual stocks in Brazil and Mexico. In addition, Karemera 20 For Peer Review 21 et al. (1999) find that stock -return series in Brazil, Chile, and Mexico in general are not weak - 22 23 form efficient; equally Mookerjee and Yu (1999), Groenewold et al. (2003) and Lima and 24 25 26 Tabak (2004) document that the stock markets in China are not weak -form efficient, and 27 28 Abeysekera (2001) and Abraham (2002) reject the hypothesis of weak -form efficiency for 29 30 31 stock markets in Sri Lanka, Kuwait, Saudi Arabia and Bahrain. 32 33 Other studies, however, provide evidence that stock markets in some emerging market 34 35 economies are efficient. Dockery and Vergari (1997) document that the Budapest Stock 36 37 38 Exchange is effici ent in the weak form. In addition, studies by Karemera et al. (1999) and 39 40 Buguk and Brorsen (2003) support the null hypothesis of weak -form market efficiency for the 41 42 stock market in Turkey. For Africa, Dickinson and Muragu (1994), and Olowe (1999) find 43 44 45 that the Nairobi and Nigerian stock exchanges are efficient in the weak form. Seddighi and 46 47 Nian (2004) document that the Shanghai Stock Exchange is weak -form efficient for the 48 49 period from Jan. 4, 2000 to Dec. 31, 2000. Fawson et al. (1996), Alam et al. (1999), and 50 51 52 Chang and Ting (2000) support the hypothesis that the Taiwanese stock market is efficient in 53 54 the weak form. Similarly, the null hypothesis of market efficiency cannot be rejected for the 55 56 57 Hong Kong stock market (Karemera et al., 1999; Alam et al., 1999; Cheung and Coutts, 58 59 60 1 According to the weak form of the EMH a market is efficient if current prices fully reflect all information contained in past prices (Fama, 1970). It implies that past prices cannot be used as a predictive tool for future stock price movements and hence it is not possible for a trader to make abnormal returns by only using the past history of prices. 2 Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Page 3 of 35 Submitted Manuscript 1 2 3 2001; and Lima and Tabak, 2004). In addition, it is documented that stock markets in the 4 5 6 ASEAN region (Indonesia, Malaysia, Thailand and Singapore) behave in line with the weak 7 8 form of the EMH (Barnes, 1986; Karemera et al., 1999; Alam et al., 1999). With respect to 9 10 the Southern part of Asia, Sharma and Kennedy (1977) and Alam et al. (1999) provide 11 12 13 evidence supporting the hypothesis of market efficiency for the Bombay (India) and Dhaka 14 15 (Bangladesh) Stock Exchange. Thus, results regardin g market efficiency are mixed and 16 17 18 country -dependent. 19 20 While studies Foron stock marketsPeer in emerging Review markets are widely available, so far not 21 22 any study has focused on Vietnam. This is unfortunate, since the Vietnamese stock market, 23 24 25 although still characteriz ed by low capitalisation and thin trading, is rapidly developing. The 26 27 Vietnamese stock market also is an interesting case since Vietnam is one of the world’s few 28 29 remaining communist countries and insight into the functioning of a typically capitalist 30 31 32 insti tution like a stock market within such a country could give new perspectives on the 33 34 possible co -existence of elements of different ways of organizing economic and poli tical 35 36 systems. T he main Vietnamese stock market, formally known as the Securities Trading 37 38 39 Centre (STC), located in Ho Chi Minh City, was launched on July 28, 2000. At the opening 40 41 trading session only two stocks with a total market capitalisation of VND 444,000 million 42 43 44 (about USD 28.20 million) were traded at the market. Over five years of oper ation (until the 45 46 end of 2005), the number of listed companies has increased to 32, with a total market 47 48 capitalisation of VND 6,337,480 million (about USD 402.38 million). 49 50 51 This paper aims to have a closer look at the stock market in Vietnam. We describe, in 52 53 detail, the organisation of the Vietnamese stock market and its development. We focus on 54 55 whether the Vietnamese stock market is weak -form efficient. The reason behind this is that if 56 57 58 the evidence would fail to support the weak -form of market efficiency, it is not necessary to 59 60 examine the EMH for the more demanding degrees of the semi -strong and strong form (Wong 3 Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK Submitted Manuscript Page 4 of 35 1 2 3 and Kwong, 1984). As such testing for weak -form efficiency is a logical first step in 4 5 6 investigating market efficiency in a certain stock market . To test for market efficiency we 7 8 apply autocorrelation tests, runs tests and variance -ratio tests. The data used for these tests 9 10 consists of observed weekly returns of the market index and five individual stocks listed on 11 12 13 the market. A special feature of the analysis is that we correct the data for thin (infrequent) 14 15 trading, which is a prominent characteristic of the Vietnamese stock market. 16 17 18 The remainder of this paper is organised as follows. Section 2 provides an overall 19 20 description of the organisationFor Peerand operation Review of the Vietnamese stock market.
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