Luận văn thạc sĩ UEH the impact of macroeconomic factors on conditional stock market volatility in

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MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS HOCHIMINH CITY

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NGUYỄN THÚY VÂN

THE IMPACT OF MACROECONOMIC FACTORS ON

CONDITIONAL STOCK MARKET VOLATILITY

IN VIETNAM

MAJOR: BANKING AND FINANCE

MAJOR CODE: 60.31.12

MASTER THESIS

INSTRUCTOR: Doctor TRƯƠNG QUANG THÔNG

Ho Chi Minh City – 2011

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ACKNOWLEDGEMENT

Firstly, I would like to express my sincerest gratitude to my supervisor, Dr.

Truong Quang Thong for his valuable guidance and helpful comments during the

course of my study.

I also would like to thank all of my lecturers at Faculty of Banking and

Finance, University of Economics Hochiminh City for their English program,

knowledge and teaching during my master course at school.

I would like to specially express my thanks to my classmates, my friends for

their support and encouragement.

Special thanks should go to my family for their love and support during my

life.

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ABSTRACT

The study looks at the relationship between macroeconomic factors and and

stock market, and determined whether inflation, movements in exchange rate,

interst rate have an effect on stock market return volatility in Vietnam. The

Generalised Autoregressive Conditional Heteroskedascity (GARCH) models are

used in establishing the relationship between these variables and stock market

volatility. The results confirms presence of GARCH (1,1) effect on stock return time

series of Vietnam stock market. It is also found that there is strong and positive

relationship between inflation and stock market return volatility. It means that an

increase in inflation leads to an increase in stock market return volatility in the long

run. However, there is no enough proof to conclude that change in interest rate and

exchange rate can influence market return volatility.

Keywords: volatility, leverage, interest rate, inflation, exchange rate,

returns, Hochiminh Stock Exchange

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Table of contents

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CHAPTER 1 Introduction................................................................................1

1.1 Introduction .........................................................................................1

1.2 Research problem................................................................................2

1.3 Research objectives.............................................................................3

1.4 Research methodology and scope .......................................................3

1.5 Structure Of The Study........................................................................4

CHAPTER 2 Literature review........................................................................6

2.1 Introduction .........................................................................................6

2.2 ARCH and GARCH model .................................................................6

2.2.1 Autoregressive Conditional Heteroskedasticity (ARCH) ............7

2.2.2 Generalized Autoregressive Conditional Heteroskedasticity

(GARCH) 8

2.3 The impact of macroeconomic variables on stock market volatility ...8

2.3.1 Inflation.......................................................................................10

2.3.2 Interest rate .................................................................................11

2.3.3 Exchange rate .............................................................................13

2.4 Application of Garch model in Vietnam...........................................14

2.5 Conclusion.........................................................................................15

CHAPTER 3 Research Methodology ............................................................16

3.1 Introduction .......................................................................................16

3.2 Research data and construction of variables: ....................................16

3.2.1 Research data ..............................................................................16

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3.2.2 Construction of variables for the models: ..................................23

3.3 DF unit root test:................................................................................25

3.4 Hypotheses and empirical models.....................................................26

3.4.1 Model 1: The standard GARCH (1,1) model .............................26

3.4.2 Applying GARCH (1,1) models to find out the impact of

macroeconomic variables on stock return volatility .........................................27

3.5 Conclusion.........................................................................................28

CHAPTER 4 Empirical Results of the Research...........................................29

4.1 Introduction .......................................................................................29

4.2 Descriptive statistics..........................................................................29

4.3 DF unit root test.................................................................................30

4.4 Correlation Matrix of the variables...................................................30

4.5 Emprical result of model ...................................................................31

4.5.1 Model 1: Standard GARCH (1,1)...............................................31

4.5.2 Model 2.......................................................................................32

4.5.3 Model 3.......................................................................................34

4.5.4 Model 4.......................................................................................35

4.5.5 Model 5.......................................................................................37

CHAPTER 5 Conclusions, Limitations and recommendations.....................39

5.1 Introduction..........................................................................................39

5.2 Conclusions and Implications..............................................................39

5.3 Limitations and recommendations:......................................................40

REFERENCES...............................................................................................42

APPENDIX....................................................................................................45

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1. Descriptive Statistics of variables .....................................................45

2. Monthly CPI from 2000 – 2010 (Source: GSO) ...............................47

3. Unit root test.....................................................................................48

4. Data....................................................................................................50

Figures

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Figure 3.1 The performance of VN-Index from 07/2000 – 12/2010 .............17

Figure 3.2 Inflation in Vietnam and selected countries 2000 - 2009.............19

Figure 3.3 Vietnam‟s nominal exchange rate (VND/USD) and inflation rate

1992-2010..................................................................................................................20

Tables

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Table 3.1 Vietnam exchange rate arrangement 2000 - 2010 .........................22

Table 4.1 Descriptive statistics of variables (07/2000 – 12/2010) ................29

Table 4.2 ADF UNIT ROOT TEST ..............................................................30

Table 4.3 Correlation Matrix of the variables................................................31

Table 4.4 Result of model 1 ...........................................................................31

Table 4.5 Result of model 2...........................................................................33

Table 4.6 Result of model 3 ...........................................................................34

Table 4.7 Result of model 4 ...........................................................................36

Table 4.8 Result of model 5 ...........................................................................37

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