Luận văn thạc sĩ UEH determinants of foreign exchange rate, case of vietnamese dong and japanese yen

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS

PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DETERMINANTS OF FOREIGN EXCHANGE

RATE: CASE OF VIETNAMESE DONG AND

JAPANESE YEN

BY

Mr. TRAN VUONG TU

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, MAY 2013

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UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS

PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DETERMINANTS OF FOREIGN EXCHANGE

RATE: CASE OF VIETNAMESE DONG AND

JAPANESE YEN

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

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

Mr. TRAN VUONG TU

Academic Supervisor:

PhD. NGUYEN HOANG BAO

HO CHI MINH CITY, MAY 2013

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ACKNOWLEDGEMENT

This thesis was written at the University of Economics Ho Chi Minh City. In addition,

it was completed in October 2013. During the process of writing, the paper has gained

a lot of experience in writing a thesis and in the area of foreign exchange rate analysis.

During the three months of writing this thesis, several persons have contributed in the

different ways to the quality of this thesis and the paper would like to take this

opportunity to thank them.

Firstly, the paper would like to thank our supervisor PhD. Nguyen Hoang Bao for all

the help, guidance, and support. The paper would also like to express gratitude to all

professors of the Vietnam-Netherlands Program for the Master in Development

Economics and the classmates who offer to us some useful suggestions. Finally, we

express special thank to our families and partners for their love and support.

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ABSTRACT

Exchange rate not only plays a very important role in the economic policy of the

government of Vietnam in the process of integration into the world economy, but also

effects many exporters, importers, foreign investors, and commercial banks in the

international transaction.

Japanese economy plays as important as having mainly economic relations with

Vietnamese economy in the export-import trade, foreign direct investment (FDI) capital,

official development assistance (ODA), etc. However, Vietnam government applies the

floating exchange rate policy between Vietnamese Dong and the Japanese Yen.

Therefore, the fluctuations of Vietnamese-Japanese exchange rate might great impact

on the trade and investment. The exporters and importers of two countries, Japanese

investors, the commercial bankers that having international settlement with Japanese

Yen, are in need of defending the exchange rate risk volatility of the exchange rate pairs.

Our study enhance on analyzing and predicting the fluctuations of Vietnamese-Japanese

exchange rate. The main research question identifies (1) Which Vietnamese and

Japanese macroeconomics variables determine the VND/JPY exchange rate; (2) What

the role of the Japanese Yen plays in the economic relationship between Vietnam and

Japan and (3) Which performance of the multiple regression model and the auto￾regressive integrated moving average model are in predicting the VND/JPY exchange

rate. Methodology focuses on the multiple regression model to define the determinants.

Moreover, our study test the reliability in the prediction between multiple regression

model and auto-regressive integrated moving average model to examine the VND/JPY

exchange rate data. Hence, auto-regressive integrated moving average model plays

better forecasting performance.

Key Words: VND/JPY exchange rate, multiple regression model, auto-regressive integrated moving

average (ARIMA), Vietnamese Dong, Japanese Yen, Vietnam, Japan

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5

TABLE OF CONTENTS

Table of contents ......................................................................................................... 1

List of tables ................................................................................................................ 3

List of figures .............................................................................................................. 3

List of abbreviations .................................................................................................... 4

1. Chapter one: Introduction...................................................................................... 5

1.1 Background of study ............................................................................................. 5

1.2 Research question ................................................................................................. 7

1.3 Research objective ................................................................................................ 8

1.4 The outline of paper .............................................................................................. 8

2. Chapter two: Literature review ............................................................................. 9

2.1 Theoretical framework .......................................................................................... 9

2.2 Empirical Studies .................................................................................................. 14

3. Chapter three: Methodology ................................................................................. 17

3.1 Data ....................................................................................................................... 17

3.2 The fundamental regression model ....................................................................... 18

3.3 Box-Jenkins’ auto-regressive integrated moving average model (ARIMA) ........ 19

4. Chapter four: The impact of the Japanese Yen in the economic relationship

between Vietnam and Japan ........................................................................................ 23

4.1 Overview of the Vietnamese foreign exchange policy ......................................... 23

4.2 Overview of the Japanese foreign exchange policy .............................................. 25

4.3 The impact of the Japanese Yen in the trade, investment, and finance between

Japan and Vietnam ...................................................................................................... 27

5. Chapter five: Results: Descriptive data, multiple regression and ARIMA ........... 32

5.1 Descriptive statistics ............................................................................................. 32

5.2 The results and summary of findings .................................................................... 34

5.3 Forecasting performance ....................................................................................... 38

6. Chapter six: Conclusions ....................................................................................... 41

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6.1 Summary of study ................................................................................................. 41

6.2 Policy implication ................................................................................................. 42

6.3 Limitation of our study and suggestion for further research ................................ 42

References ................................................................................................................... 44

Appendix A ................................................................................................................. 50

Appendix B ................................................................................................................. 52

Appendix C ................................................................................................................. 60

Appendix D ................................................................................................................. 70

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LIST OF TABLES

Tables 2.1 Description of economic indicators ........................................................... 12

Tables 2.2 Empirical Studies ...................................................................................... 14

Tables 3.1 Variable sources ........................................................................................ 17

Tables 3.2 List of variables ......................................................................................... 18

Tables 3.3 The autocorrelation function (ACF) and the partial autocorrelation function

(PACF) patterns summary .......................................................................................... 20

Tables 4.1 Global foreign exchange reserves ............................................................. 26

Tables 4.2 History of the Japan's interventions in the foreign exchange rate ............. 26

Tables 5.1 Description of the variables ....................................................................... 32

Tables 5.2 Correlation test and Anova F-test .............................................................. 33

Tables 5.3 The result regression model ...................................................................... 34

Tables 5.4 Wald Test .................................................................................................. 35

Tables 5.5 Unit Root Test ........................................................................................... 36

Tables 5.6 ARIMA statistical results .......................................................................... 37

Tables 5.7 The VND/JPY forecasting performance ................................................... 38

Tables 5.8 Testing of forecasting ARIMA ................................................................. 39

Tables 5.9 The advantages and disadvantages in the multiple regression and Auto￾regressive integrated moving average model (ARIMA) ............................................. 40

LIST OF FIGURES

Figure 3.1 Box Jenkins Methodology for ARIMA modeling ..................................... 19

Figure 4.1 Value of trade balance Vietnam-Japan ...................................................... 28

Figure 5.1 The plot of the monthly VND/JPY exchange rate.................................... 36

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