Luận văn thạc sĩ UEH credit growth, macroeconomic factors and ftock performance, the case of hose

•

UNIVERSITY OF ECONOMICS

HO CHI MINH CITY

VIETNAM

INSTITUTE OF SOCIAL STUDIES

THE HAGUE

THE NETHERLANDS

VIETNAM- NETHERLANDS

PROGRAM FOR M.A IN DEVELOPMENT ECONOMICS

~ ~~~ CREDIT GROWTH, MACROECONOMIC

;;

FACTORS AND STOCK PERFORMANCE:

THE CASE OF HOSE 2002-2010

A thesis submitted in partial fulfillment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

NGUYEN THI NGOC HAN

Academic supervisors

Dr. PRAM HOANG VAN

Dr. NGUYEN TRONG HOAI

HO CHI MINH CITY, MARCH 2011

r UEH--15Ti fa 4. ~~It~ I. -~---... 1

L ··-·---··-·---J·

a..- -. ·--· . - -----· ---------· -~- ,..... . -· -·-·

LUAN VAN CHAT LUONG download : add [email protected]

TABLE OF CONTENT

1. 1~1rlt()])1J(:1rl()~--------------------------------------------------------------------------------------4

2. ~11r~Fll\1r1J~ ~~~~=---------------------------------------------------------------------------10

2.1 KEY CON CEPTS---------------------------------------------------------------------------------------1 0

2.2 TliEOFt!:TICJ\1. I.ITEFlf\T~---------------------------------------------------------------------11

2.3 ElVfPIFtiCJ\I. I.ITEFlf\TlJFtE--------------------------------------------------------------------------17

3. ~~1rll()])()~()(;1{: ----------------------------------------------------------------------------------25

3 .1 Ftl:S EJ\Ft C II MET II 0 D S------------------------------------------------------------------------------26

3.2 DJ\TJ\ I>ESCFtiPTION--------------------------------------------------------------------------------35

3. 3 I> J\ T J\ J\N J\I. Y S I S-------------------------------------------------------------------------------------3 7

4. ~SlJ~ 1r A~ A~ 1rSIS: -------------------------------------------------------------------------------41

4.1 I> ESCFtiPTIVE J\N J\I. YSI S--------------------------------------------------------------------------41

·i 4.2 ST J\ TIONJ\FtY PFtOPEFtTY OF TlME-SEFtiES I>J\ T J\-----------------------------------------44

4.3 BIVJ\FliTJ\TE FtEI.J\TIONSIIIPS: EG J\PPFtOJ\Cli & GFlf\NGEFt CAlJSJ\LITY---------45

4.4 MlJI. TIV J\Ftll\ TE Ftl:I.J\ TIONSIIIP: JJ PFtOCEDlJFtE, VECM, V J\FliANCE

;;

I>ECOMPOSITION & IMPlJI.SE FtESPONSE FlJNCTIONS----------------------------------48

5. <:O~<:~lJSIO~ AN]) PO~I<:1r ~<:O~~~~])AlliO~S:-----------------------------------57

5. 1 Ftl:S EJ\Ft CII FINDINGS -------------------------------------------------------------------------------51

5.2 POLICY FtECO MMENI> J\ TI ONS-------------------------------------------------------------------59

5. 3 L11V1IT J\ TI 0 N J\NI> S lJ GG ES TEI> S TlJI> IE S-----------------------------------------------------60

6. ~J?~~~<:~S-----------------------------------------------------------------------------------------61

7. J\PP~~])I)(----------------------------------------------------------------------------------------------64

2

LUAN VAN CHAT LUONG download : add [email protected]

ABSTRACT

The paper analyzes the dynamic interactions among credit growth, some fundamental macro￾economic factors (exchange rate, inflation, industrial production, interest rate, gold price) and the

performance of Vietnam Ho Chi Minh Stock Exchange using time series econometrics of

cointegration and causality tests. In the analysis, we explore further with V AR-based variance

decomposition and impulse response functions to capture the direct and indirect effects of

innovations in one variable and other ones in the same model. The interesting results come out

with negative reaction of stock price to credit growth in first 11 months of study period before

any reverse trend occurs. And then it will still remain the sign in longer term. However, it seems

no significant evidence to prove the positive short-run impact of credit rate on stock price

increase. So Interest subsidy policy after global crisis (2008) is not the major reason to rescue

equity market. In addition, the variation of key variables including interest rate, inflation and

exchange rate has significant impacts on stock volatility in long run. One important policy

implication is that authorities should be cautious in implementing monetary policies exposed to

inflation risk as it has a consistent adverse influence on stock change in both short and long term.

Keywords: Credit growth, Macro-economics, Stock performance and

Impulse Response Function.

3

LUAN VAN CHAT LUONG download : add [email protected]

CHAPTER 1: INTRODUCTION

1.1 Research context:

Ho Chi Minh Stock Exchange (HOSE), formerly HOSTC, is the older of the two stock

exchanges in Vietnam. Established on 20 July of 2000, it started operation on 28 July in the same

year. The trading system of all stocks listed in HOSE is under the control of State Securities

Commission (SSC). HOSE runs as a state-owned one member limited liability company with

one-billion VND of chartered capital. At the very beginning, there were only two listed firms,

namely REE and SACOM traded two days per week. From 1 March 2002, market traded daily

with two order-matching sessions. Till 31 December 2007, 138 stocks were listed and traded five

days per week through a fully-computerized trading system, Automatic Order-Matching and Put￾Through Trading system. In general, the total capitalization in HOSE accounts for over 40%

GOP. During operating time, Vn-Index had a sharp fluctuation peak to 1137 in February of2007

and then turned down sharply, which shocked almost investors and policy authorities. According

to some former studies, the root cause is originated from market participant's over-expectation

on booming price.

Despite HOSE's certain achievements over year, it is still fragile due to its own high risk,

big price volatility and poor trading system. As one of Asian emerging markets, HOSE has

experienced ups and downs because of the significant influences from external and internal

factors. In reality, many controversial problems signal the market inefficiency and instability in

terms of information asymmetry, a weak legal framework, the lack of transparency in financial

reporting, too much Government intervention in trading transactions and herding investor

4

LUAN VAN CHAT LUONG download : add [email protected]

behaviors. Indeed, these weaknesses are the challenges of Vietnam economy towards financial

liberalization process. Thus, HOSE in particular or Vietnam stock exchange in general hopefully

will develop into a strongly efficient capital-raising channel in the near future.

In the development period, the required tasks for policy makers from now on is to do

more qualified researches on Vietnam stock market and prevailing problems for timely

adjustment. Observing the economic changes since 2002, the rapid domestic credit has grown by

nearly 10 times, from about 2 hundred thousand up to more than 2 million billion dong.

Simultaneously, stock market boomed aggressively in 2007 when VN Index created history

(Figure 1.1). And the question whether these two factors have any links has raised the interest in

further estimation. Then its empirical result below can explain the relationship between domestic

credit growth and stock volatility, especially in the period right after the peak in 2007 until the

broadening monetary policy in 2009.

Figure 1.1: VN-Index & Credit aggregate in 2002Ml-2010M3

5

LUAN VAN CHAT LUONG download : add [email protected]

1,000

800

600

400

200

2,000,000

1,600,000

1,200,000

800,000

400,000

VNINDEX

2002 2003 2004 2005 2006 2007 2008 2009

DOMESTIC CREDIT

2002 2003 2004 2005 2006 2007 2008 2009

Sources: IMF (20 1 0)

6

LUAN VAN CHAT LUONG download : add [email protected]

!

Let's discuss more about Vietnam economic background and why credit growth

accelerated the period prior to 2008. A relevant update from World Bank (2007) gave some

explanation related to the so-called "Impossible trinity" of simultaneously maintaining nearly

fixed foreign exchange, independent monetary policy and an open capital account. Under this

implementation, the incident following increasing capital inflows was foreign exchange

depreciation or domestic currency appreciation that kept appealing more investors. The economy

was put in a challenge of excess liquidity. Due to its negative impact on Vietnam

competitiveness of export and growth slow-down, the Government intervened by purchasing

foreign exchange and selling securities. Then it moved foreign exchange market much flexibly.

However, the foreign reserve accumulation and VND appreciation forced SBV to choose

monetary and credit expansion in term of sterilization. This also hid potential exposure to

inflation and then unpredictable capital outflows, most seriously a crisis (2008) when the stock

value returned its real value. So it raises the interest in finding the real impact of credit growth on

stock performance scientifically over the period which will be presented in the following parts.

1.2 The scientific challenge:

The research will discover whether credit shocks have significantly affected HOSE

performance. Particularly, the credit growth under interest support program in 2009 aimed at

economic stimulation after global crisis in 2008. And thesis also generalizes how lagged length

between credit growth and stock price reaction would be. Further estimation will uncover which

of key macroeconomic and trend variables has remarkably influenced on stock price in both

short and long run since 2002. Based on the empirical result, stock investors, academic

economists and authorities can refer to the findings for their own decision-making. However,

7

LUAN VAN CHAT LUONG download : add [email protected]

some existing limitation of data and quantitative tools to interpret it in economic meaning are

necessary for further research then.

1.3 Goal and objectives of the research:

The overall goal of the project is to provide scientific results as trustworthy references for

stock investors. And then it gives some appropriate policy recommendations related to credit

applicable for the development of Ho Chi Minh Stock Exchange and Vietnam economy as a

whole.

To meet the goal, the first specific objective of the research is to identify the

cointegration and causality of domestic credit growth to HOSE's performance. Next is to analyze

the lag length between the prominent change in some monetary policies and its impact on stock

price market over 2002-20 I 0. Especially and specifically, how Decision 131-2009-QD-TTg on

Interest Rate Support for Organizations to expand their Production and Business affected stock

price will be discussed in the paper. By application of V AR and monetary transmission

mechanism (MTM), the research functions forecasting the stock volatility.

The second objective is to explain more about interactions among credit growth, other

key macroeconomic indicators and HOSE index. The testing will identify how significant and

which relationships, negative or positive, each independent macro-variables impact on the

dependent stock price.

The last is to gtve some recommendation for both stock exchange managers and

government policy makers.

8

LUAN VAN CHAT LUONG download : add [email protected]

1.4 Research Questions:

In order to achieve the above objectives, let's try to answer the following questions:

1. Is there any relationship between credit growth rate and stock price index in long￾term as well as short-term?

2. Among potential substitute investment channels via foreign exchange, gold, money

and overseas stock markets, does domestic interest rate have the immediate effect on

the stock price variation?

3. Associated with credit, are all selective macroeconomic factors necessary for

forecasting HOSE price change in the long-run? If yes, what is the sign of individual

relationship between stock price and the others?

1.5 Structure of the thesis:

The thesis will follow introduction section with four other chapters. Chapter 2 reviews

the applicable theories of stock price determination as well as empirical studies about the

relationship between security index and macro-economic indicators. Chapter 3 describes

research methodology including data collection, variables of interest, econometric model

together with empirical procedures. Chapter 4 analyses the research results according to methods

recommended previously. It answers the thesis hypotheses whether the causality of Credit

growth to stock price change exists, which market the main substitute for stock investment

channel is and whether other macro-variables have significant impacts on stock variations. And

chapter 5 closes the study with a conclusion, policy implication and opens with its limitation for

further studies.

9

LUAN VAN CHAT LUONG download : add [email protected]

CHAPTER 2: LITERATURE REVIEW FOR STOCK'S RELATIONS WITH MACRO￾ECONOMIC FACTORS

This section will provide general concepts and previous valued researches based on

which the study can construct. It includes four main parts: key concepts, theoretical review,

empirical review and conceptual framework.

2.1 Key concepts:

2.1.1 Credit channel

Credit channel as suggested by Mishkin (1995) operates through two components - the

balance sheet channel and the bank lending one. The concept explains that increasing money

supply increases total credit that banks can supply to country economy. And then through the

bank financing channel, it will in tum boost aggregate demand and output, eventually push up

stock price. In line with the balance sheet channel, Bemanke and Gertler (1995) concerned the

external finance premium, which they defined as the bridge between the externally-raised cost of

funds and the opportunity cost of internal funds. Yet, this seems not significant in the case of

Vietnam because most credit has recently been granted to big state-owned enterprises regardless

ofthe consideration of their financial position. Briefly, domestic credit growth via banking loans

is the channel the State Bank uses to inject liquidity to the whole market.

2.1.2 Macro-economics

Macroeconomics is the study of the performance, structure and behavior of the entire

economy as a whole. It is different from microeconomics which focuses more on individuals and

10

LUAN VAN CHAT LUONG download : add [email protected]