MACROECONOMIC INDICATORS AND STOCK MARKET RETURNS IN EMERGING ECONOMIES: THE CASE OF VIETNAM THUY THU NGUYEN BA., MSc. Supervised by: Dr. Kadom Shubber Dr. Keith Luo Thesis submitted to the London School of Commerce/Cardiff Metropolitan University in partial fulfillment of the requirements for the degree DOCTOR OF PHILOSOPHY 2016 LONDON SCHOOL OF COMMERCE Candidate's Surname/Family Name: NGUYEN …………………………………………………… Candidate's Forenames: THU THUY ………………………………………………………………… Candidate for the Degree of PhD ………………………………………………………………………… Full Title of Thesis: Macroeconomic Indicators and Stock Market Returns in Emerging Economies: The Case of Vietnam …………………………………………………… __________________________________________________________________________ Abstract The prime contribution of this research is that it provides various empirical results regarding the bivariate and multivariate causality and cointegrating relationships between Vietnam’s stock market returns and macroeconomic variables, specifically those pertaining to economic growth (GDP), consumer price index (CPI), broad money supply (M2), interest rates (IR – including deposit rate DR, lending rate LR, and refinancing rate FR), foreign exchange rate USD/VND (EX), and foreign direct investment (FDI). The robustness of Vector Autoregressive (VAR) and Generalized Autoregressive Conditional Heteroskedasticity (GARCH) frameworks were tested for Vietnam, which is a new emerging market. Using an updated data set of 161 monthly observations collected for the period from August 2000 to December 2013, a unique equation that represents the linkage among variables of interest was established. Particularly, a wide range of techniques, including unit root tests, Johansen cointegration tests, Granger causality tests, dynamic analysis (impulse response function and variance decomposition) were employed, which demonstrated that the VN-Index corresponds to long run, and also short run, path of selected macroeconomic variables. Furthermore, taking the volatility clustering into account, GARCH (1,1) models reveal the predictability of stock market volatilities using previous shocks (i.e. those originating from GDP, CPI and EX) rather than the previous volatility itself. The discussion of empirical findings has additionally been substantiated and corroborated via a field questionnaire, which gathered views of experts who are directly or indirectly involved with Vietnam’s stock market. The empirical results, along with the outcome of the empirical survey, provide the basis for policy and investment implications, emphasizing that using macroeconomic indicators would be beneficial to policy-makers, as well as securities investors, in promoting the development of Vietnam’s stock market. The addition of external shocks (i.e. global crash 2007-2008) and/or other portfolios of stocks (VN30-Index, HNX-Index, HNX30-Index, UPCoM-Index) could be considered in further research. DedicatioN This thesis is dedicated to my parents for their unconditional love, care and support throughout my life. They always stand by me; give me guidance and inspiration anytime I needed. This thesis is also dedicated to my gorgeous husband for his love, constant encouragement, patience, and understanding throughout the years I conducted my research despite the geographic distance. This work is especially dedicated to my wonderful little son for simply being there for me throughout the entire doctorate program. Last, but not the least, I dedicate this thesis to my parents-in-law for their kindness and support. There is no doubt in my mind that without the stimulus and inspiration from my whole family, I would never have been able to complete this work. iii Acknowledgements It is a great pleasure to acknowledge the debt I owe to many people for their help over the last three years. First of all, I would like to express my gratitude to my Director of Studies, Dr. Kadom Shubber, and my supervisor, Dr. Keith Luo, and thank them for their enthusiastic guidance and inspirational support on my research project. I would like to acknowledge their fully instruction, critical review and detailed feedback for every single chapter of my thesis that help me to accomplish my project in timely manner. My sincere thanks are also given to Prof. Don Harper, Prof. Eleri Jones, Prof. Nandish Patel, Prof. Peter Abell and all the staffs in the Research Degree Center at London School of Commerce and Cardiff Metropolitan University, who provided many useful sessions and workshops during my doctoral course. Besides, I would like to thank all my course-mates, especially all the members in Peer Support Network, who are not only willing to share their ideas, advice, but also their encouragement and enthusiasm during the entire program. I would like to acknowledge the financial assistance that I received from the Vietnam International Educational Department (VIED), Ministry of Education of Vietnam. I would also like to acknowledge the great support from all my colleges in Faculty of Banking and Finance- Foreign Trade University of Vietnam during the time I worked on the doctorate program. Finally, thanks are due to my loving parents, my husband, my parents-in- law, my son, my brother, my sister-in-law, and all my close friends for their encouragement, understanding and inspiration throughout the last three years. There are no words to express how grateful I am to have them by my side for all the time. iv Table of Contents LIST OF FIGURES .......................................................................................................................................... IX LIST OF TABLES ............................................................................................................................................ XI ABBREVIATIONS ....................................................................................................................................... XIII CHAPTER 1: THE NATURE AND SIGNIFICANCE OF THE RESEARCH .............................................. 1 1.1. INTRODUCTION .................................................................................................................................................. 2 1.2. RESEARCH BACKGROUND ............................................................................................................................. 3 1.3. RESEARCH MOTIVATION ............................................................................................................................... 8 1.4. RESEARCH AIM AND OBJECTIVES ............................................................................................................ 12 1.5. RESEARCH CONTRIBUTIONS ...................................................................................................................... 14 1.6. STRUCTURE OF THE THESIS ...................................................................................................................... 16 CHAPTER 2: REVIEW OF VIETNAM’S ECONOMY AND STOCK MARKET .................................... 19 2.1. INTRODUCTION ................................................................................................................................................ 20 2.2. BACKGROUND ON VIETNAM’S ECONOMY, 1975-2000 .................................................................. 21 2.2.1. The Centrally Planned Economy, 1975-1985 ............................................................................. 21 2.2.2. The Transition of Vietnam’s Economy to the Market, 1986-1999 .................................... 24 2.3. MACROECONOMIC PERFORMANCE OF VIETNAM, 2001-2013 .................................................. 28 2.3.1. Overview of Vietnam’s Macroeconomic Performance, 2001-2010 .................................. 29 2.3.2. Updates of Vietnam’s Macroeconomic Performance, 2011-2013 ..................................... 40 2.4. OVERVIEW OF THE VIETNAM’S STOCK MARKET, 2000-2013 .................................................... 42 2.4.1. Historical Review of the Vietnam’s stock market, 2000 - 2013 .......................................... 43 2.4.2. The Development of Vietnam Stock Exchanges ......................................................................... 44 2.4.3. Key Indicators of the Vietnam’s stock market ............................................................................ 46 2.4.4. Linkage between Vietnam’s stock market and macroeconomic variables ..................... 51 2.5. CONCLUSIONS ................................................................................................................................................... 53 CHAPTER 3: THEORETICAL FRAMEWORK AND LITERATURE REVIEW ................................... 54 3.1. INTRODUCTION ................................................................................................................................................ 55 3.2. THEORETICAL FRAMEWORK ON THE BEHAVIOR OF STOCK MARKET RETURNS ........... 56 3.2.1. Efficient Market Hypothesis ............................................................................................................... 56 3.2.2. Dividend Discount Model .................................................................................................................... 57 3.2.3. Capital Asset Pricing Model ................................................................................................................ 60 3.2.4. Arbitrage Pricing Theory ....................................................................................................................