Accep tability of the trend forecasting model using the time series analysis of stock indices

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ACCEPTABILITY OF THE TREND FORECASTING MODEL USING

THE TIME SERIES ANALYSIS OF STOCK INDICES

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A DISSERTATION

Presented to the Faculty of the Graduate School

Southern Luzon State University, Lucban, Quezon, Philippines

in Collaboration with

Thai Nguyen University, Socialist Republic of Vietnam

___________________________

In Partial Fulfillment

of the Requirements for the Degree

Doctor of Business Administration

___________________________

By

DAO THE HUY (IT)

December 2013

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Chapter 1

INTRODUCTION

To industrialize and modernize the country requires an effort to

maintain stable economic growth and restructure the economy to enhance its

efficiency and competitiveness, Vietnam needs huge capital investment.

Therefore, building the securities market in Vietnam has become an urgent

need to mobilize mid-term and long-term capital within, as well as outside the

country into economic investment through debt and capital securities. In

addition, equitization of state-owned enterprises along with the establishment

and development of the securities market has created a more open and

healthy business environment.

On July 10, 1998, the Prime Minister signed Decree No. 48/1998/ND￾CP on the stock and securities market and a decision to set up two securities

trading centers in Hanoi and Ho Chi Minh City. (The Vietnam STATE

SECURITIES COMMISSION (SSC), 2012). On July 20th 2000, the Ho Chi

Minh City Securities Trading Center officially commenced operation and

executed the first trading session on July 28, 2000 with two types of listing

stocks.

After seven years of growth and integration into the global securities

market, the government signed Decision No. 599/QD-TTg on May 11, 2007 to

transfer the Ho Chi Minh City Securities Trading Center to Hochiminh Stock

Exchange (HOSE). On August 8, 2007, Hochiminh Stock Exchange was

officially opened.

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Hanoi Stock Exchange (HNX) was established by Decision no.

01/2009/QĐ-Ttg dated January 02, 2009 by the Prime Minister of Vietnam on

the grounds of transforming and restructuring Hanoi Securities Trading

Centre. Hanoi Securities Trading Centre (HASTC), which was founded in

compliance with Decision No.127/1998/QĐ-TTg dated July 11, 1998, has

gone live since 2005 organizing share auctions and bond biddings. It also

provides a secondary market for both stocks and bonds as its major activities.

Hochiminh Stock Exchange has experienced encouraging growth. On

August 31, 2012, it has listed 303 stocks with a total capitalization value of

VND 154,137,023.19 billion and Hanoi Stock Exchange (HNX) has listed 397

stocks with a total listed value of VND 84,511,094.02 billion (The Vietnam

STATE SECURITIES COMMISSION (SSC), 2012 ) . In the near future, the

number of listed stocks on HOSE and HNX will increase quickly because the

government has a policy to equitize a number of large companies and state￾owned commercial banks which will be listed in the market.

The primary purpose of this research was to assess the Time Series

Analysis Model which the researcher has developed to help investors know

how to recognize the trend of the market and to provide objectiveness in the

decision-making process. There are more than 700 stocks (State Securities

Commission of Vietnam, 2012) for investors to choose from and this research

will help investors to make an informed decision when they take actions to

buy or sell stocks. In Vietnam, the traders mostly buy or sell by emotion or

rumors especially individual investors, therefore they almost always make a

low profit or a loss.

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There are many technical indicators to support investor decision but

these six indicators that the author used to build the Time Series Analysis

Model have not been combined in any model before, and so their usefulness

as a combined set of indicators has not yet been identified.

The researcher has more than five years of experience in stock trading

in the Vietnam market and realizes the efficiency of technical analysis, which

uses a number of core calculations based on statistical functions such as

Simple Moving Average, Exponential Moving Average (EMA), simple moving

average plus 2 standard deviations, and simple moving average minus 2

standard deviations. This research will apply statistical functions to find the

trend of Hose and Hnx and to support trading decisions.

Background of the Study

Normally, the respondents would need to consider the following

questions, so that they can not only make trading decisions, but also assess

any trend prediction model that they use:

1. What is the current trend of the Vietnam stock index?

1.1. Uptrend

1.2. Downtrend

1.3. Sideways trend

2. What are the key variables that influence the technical analysis of the

stock price?

2.1. Open price

2.2. High price

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2.3. Low price

2.4. Closed price

2.5. Volume

2.6. Date

3. What action should the investor take with each specific stock in each

period?

3.1 Buy

3.2 Sell

3.3 Wait and hold the money.

The TSA Model is designed to assist the investor to answer these

questions.

Currently some investors do not use any model, and of those that do

use a model, the indicators are often used separately and sometimes these

indicators are used incorrectly. There are about 2000 technical indicators and

most investors usually do not know what the indicator means, how to use the

indicator exactly, or how to combine the technical indicator in trading stock.

For stockbrokers, they use a variety of indicators, but they do not have a

comprehensive model that uses such a broad range of indicators together. It

is expected that the TSA Model will improve this situation for both investors

and stockbrokers.

The 2005-2009 period is considered as an acceleration phase of the

Vietnam stock market with breakthrough growth. The rate of

capitalization/GDP far exceeded the development strategy of the market by

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2010 (at 10-15% of GDP). (Source: Vietnam State Securities Committee,

2012)

With the market size in this period the number of securities companies

and investors also grew strongly. In 2000, there six were only s securities

companies with capital stock average no more than VND 50 billion and by the

end of 2009 there were 105 securities companies with average capital of VND

175 billion, of which some of the larger companies were JSC Saigon

Securities (SSI) with VND 1,000 billion and ACB Securities (ACBS) with VND

1,500 billion.

During this period, in addition to growth, the stock market also

experienced a strong change in management when the Securities Law took

effect in January 2007. In 2007, HCM City Securities Trading Center was

transformed into Ho Chi Minh City Stock Exchange (HOSE) to make it more

active in management, contributing to market development. In 2008, although

Vietnam's stock market was heavily influenced by the global economic

downturn, the average transaction volume in HOSE remained at 13 million

units/session, deploying online transactions, joint continuous orders

contributing to the operation of market transactions. In 2009, the policies of

government stimulus and signs of economic recovery helped the market to

flourish again. By the end of 2009, the total market capitalization was 620

trillion, equivalent to 38% of GDP (State securities commission of Vietnam,

2012)

In the last three years, the boom is Vietnam's stock market has fed a

storm of forecasts about market trends, stock prices and recommendations to

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buy, sell or hold specific stocks. So much information has become "disturbing"

to investors, resulting to investors not knowing what they should do. If they

make decisions following this plethora of advice, they will always lose. So how

can investor build an appropriate strategy, and make the correct trading

decisions?

Particularly dangerous are forecasts made by word of mouth, via e￾mail, telephone, message broker, analyst, consultant companies and

securities investment companies, because this wave spreads information as

fast as "oil slick". Currently, there are many ways to analyze and forecast

rumored style, jamming, and even forecast nature impose for on investor

psychology, leading investors grab market share or attempt situations that

create misunderstandings and major; distortions of the stock market in order

to profit.

The Vietnam stock market has flourished both in number of listed

stocks and the quality of shares listed over time. This is good opportunity for

stock investors, but it is also quite risky if investors are not equipped with the

right knowledge and proper investment strategy. Having all these premises in

mind, the researcher attempted to apply his knowledge of probability statistics

into technical analysis to help investors identify the trend of the Vietnam stock

market index and to support their trading decisions.

Objectives of the Study

The main purpose of this research was to assess the acceptability of

the Time Series Analysis Model using six statistical indicators of the trend of

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the Vietnam stock index trend and apply these indicators to each separate

stock to help investors make trading decisions (buy/sell/hold).

To assess the usefulness of the TSA Model in terms of:

1. Profile of the respondents

2. Reliability

3. Efficiency

4. Availability of required software and input data?

5. Level of acceptability do you experience when you use the TSA

model in assisting you to make investment decisions?

Hypothesis of the Study

1. The hypothesis itself is a null hypothesis, ―There is no significant

difference in the level of perceptions among the groups of

respondents‖. The model uses six nominated indicators to predict price

rises and price falls on the Hose and HNX stock exchanges of

Vietnam. The respondents are assessing the reliability and usefulness

of the Time Series Analysis Model for decision making for trading

actions (buy/sell/hold).

2. The level of acceptability of the trend forecasting model using the Time

Series Analysis of stock indices is dependent and affected by the

reliability, efficiency and availability variables

Significance of the Study

This study which aimed to assess the perceptions of users of the TSA

Model, used the model to discover the trends of the Vietnam stock index by

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using time series analysis in technical analysis and in supporting trading

decisions. This study would be beneficial to the following:

Stock investors. It is hoped that the study may contribute to more

informed decisions for traders. In stock investment, the action to buy, sell or

wait is a vital decision but the challenge for the investor is to find the proper

point for trading. This research will give the trader a tool or an analysis

method to find the trading point for stocks in the Vietnam stock market.

Stock Analysis Teachers. The outcome of the study may be of great

help to teachers of stock analysis as they will gain more understanding in the

use of technical analysis using time series analysis for stock trading. The

researcher may contribute to a new avenue in his search for better ways to

improve oneself and the work environment. In this way, it would ultimately

lead to a more efficient trading in the teaching of stock analysis.

Finance Students. They will benefit from this study since their main

concerns in technical analysis are what they can apply in stock investment or

commodities trading by analyzing historical data. The researcher hopes that

the results and findings of the study will bring understanding and inspiration to

students to further study this field.

Future Researchers. This study could provide a reference for future

proponents who wish to venture into a study related to this ongoing research.

Thus, using time series in technical analysis of stock trading could serve as a

valuable resource for future studies.

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Scope and Limitation of the Study

The primary aim of this study was to assess the reliability and

usefulness of the TSA Model, which applies time series analysis in technical

analysis to identify the trend of the Vietnam stock index and support trading

decisions.

This research surveyed a limited number of investors and

stockbrokers, and thus it gave the perceptions of a sample of the investment

trading community, it did not give the broad perceptions of the whole

investment trading industry.

The model uses the historic data of the Vietnam stock index including:

Vnindex for Hose and Hnindex for HNX from the years 2007 to 2013. About

seven hundred (700) stocks were used as respondents in this study.

The use of time series analysis for technical analysis in this research

included the following instructional variables: open price, high price, low price,

close price, volume and date of trading.

The limitation of using time series analysis for forecasting the trend of

stock market and for supporting trading decisions is that it can be dangerous

to depend totally on the assumption that today's prices can predict future

prices. They often do, but not necessarily.

The time frame of this study covered from March 2011 to March 2013.

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Definition of Terms

For clarity and better understanding of this study, the following terms

were hereby defined conceptually and operationally:

Acceptability. the level of acceptance of the TSA Model by investors.

Back testing. the process of testing a trading strategy on prior time

periods. Instead of applying a strategy for the time period forward, which

could take years, a trader can do a simulation of his or her trading strategy on

relevant past data in order to gauge its effectiveness.

Bear Market. a market condition in which the prices of securities are

falling, and widespread pessimism causes the negative sentiment to be self￾sustaining. As investors anticipate losses in a bear market and selling

continues, pessimism only grows. Although figures can vary, for many, a

downturn of 20% or more in multiple broad market indices such as the Dow

Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500)

over at least a two-month period is considered an entry into a bear market.

Bull Market. a financial market of a group of securities in which prices

are rising or are expected to rise. The term "bull market" is most often used to

refer to the stock market, but can be applied to anything that is traded, such

as bonds, currencies and commodities.

Close price. is the last price that the security traded for the day. Due to

its availability, the Close is the most often used price for analysis. The

relationship between the Open (the first price) and the Close (the last price)

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are considered significant by most technicians. This relationship is

emphasized in candlestick charts.

Correction. a reverse movement, usually negative, of at least 10% in a

stock, bond, commodity or index. Corrections are generally temporary price

declines, interrupting an uptrend in the market or asset

Date. the day that has the data on the stock price open, high price, low

price and closed price.

Downtrend. is the price movement of a financial asset when the

overall direction is downward. A formal downtrend occurs when each

successive peak and trough is lower than the ones found earlier in the trend.

Figure 1. Downtrend Price Movement

Source: http://www.investopedia.com

High price. is the highest price that the security traded on the day. It is

the point at which there were more sellers than buyers (i.e., there are always

sellers willing to sell at higher prices, but the High represents the highest price

buyers were willing to pay).

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Low price. is the lowest price that the security traded on the day. It is

the point at which there were more buyers than sellers (i.e., there are always

buyers willing to buy at lower prices, but the Low represents the lowest price

sellers were willing to accept).

Overbought

1. A situation in which the demand for a certain asset unjustifiably

pushes the price of an underlying asset to levels that do not support the

fundamentals.

2. In technical analysis, this term describes a situation in which the

price of a security has risen to such a degree - usually on high volume - that

an oscillator has reached its upper bound. This is generally interpreted as a

sign that the price of the asset is becoming overvalued and may experience a

pullback.

Open price. is the price of the first trade of the day. When analyzing

daily data, the Open is especially important, as it is the consensus price after

all interested parties were able to "sleep on it."

Oversold

1. A condition in which the price of an underlying asset has fallen

sharply, and to a level below which its true value resides. This condition is

usually a result of market overreaction or panic selling.

2. A situation in technical analysis where the price of an asset has

fallen to such a degree, usually on high volume, that an oscillator has reached

a lower bound. This is generally interpreted as a sign that the price of the

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asset is becoming undervalued and may represent a buying opportunity for

investors.

Resistance (Resistance Level). the price at which a stock or market

can trade, but not exceed, for a certain duration.

Figure 2. Resistance Level

Source: http://www.investopedia.com

Retracement. a temporary reversal in the direction of a stock's price

that goes against the prevailing trend. A retracement does not signify a

change in the larger trend. On a chart where a stock's price is generally

headed upward, retracements are the small dips in price that the stock

experiences during its overall upward trend. Whether an investor identifies a

change in a stock's direction as a retracement or a reversal will impact how he

responds to it.