FINANCE DISSERTATION ON Testing the Weak- Form Market Efficiency Hypothesis for Vietnam Stock Market From 2013 to 2017

Testing the Weak- Form Market Efficiency Hypothesis for Vietnam Stock Market from 2013 to 2017Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance UWE

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Testing the Weak- Form Market Efficiency Hypothesis for Vietnam Stock Market from 2013 to 2017

Dissertation submitted in partial fulfillment of the

Requirement for the MSc in Finance

UWE Bristol

University

of the West of England

FINANCE DISSERTATION ON

Testing the Weak- Form Market

Efficiency Hypothesis for Vietnam

Stock Market From 2013 to 2017

NAME OF STUDENT: Ngo Thi Minh Hoa

ID No: 17047718

Intake 1 Supervisor: Dr Tran Manh Ha

2018

Ngo Thi Minh Hoa_MSc in Finance | 1

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Executive Summary

This thesis examines the effectiveness of the Vietnam Stock Exchange Daily

observations are used in the period from 2013 to 2017 for the VN Index This studyuses the statistical method described: unit testing, variance testing, autocorrelationtest, run test of market log return to examine the effectiveness of information in themarket of Vietnam stock market The results show that daily data of the VN indexshowed signs of failure to follow the theory of random walk The study concludes thatVietnam's stock market is not Weak- Form Market Efficiency This finding is

consistent with previous studies on weak form efficiency in Vietnam

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Table of Contents

Executive Summary 2

1 Introduction 4

1.1. Purpose and contributionof research 4

1.2. Limitation of the study 4

2. Efficient Market HypothesisTheory 4

2.1. Weak form efficiency 5

2.2. Semi-strong form efficiency 5

2.3. Strong form efficiency 5

2.4 Testing models for EHM 6

2.4.1 The Fair Game Model 6

2.4.2 The Submartingale Model 7

2.4.3 The Random Walk Model 7

2.5. Vietnam Securities Market Overview 8

3 Literature review 9

4 Data 13

5 Methodologies for Weak Form market Efficiency Testing 15

5.1 Unit root test 15

5.2 Variance testing 16

5.3 Autocorrelation testing 17

5.4 Runs test 19

6 Test results analysis 21

6.1 Unit root test 21

6.2 Variance test 22

6.3 Autocorrelation test 23

6.4 Runs test 26

Autocorrelation test (LBQ test) 25

7 Conclusion 27

7 Reference 29

Web references: 32

Appendix B: Dissertation Supervision Meeting Log 34

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1 Introduction

1.1 Purpose and contribution of research

The purpose of this dissertation was to test the weak market efficiency hypothesis forthe Vietnam Stock Exchange Topics include the following objectives based on themarket theory of statistical validation methods in order to hypothesize that the stockmarket in Vietnam has a weak of information efficiency

From this topic will have a broader view of the stock market in Vietnam, concludedinformation on Vietnam’s stock market effectively or not, thus offering solutions tothe stock market Vietnam is growing

1.2 Limitation of the study.

Although I have tried a lot, I still have some limitations as follows The thesis onlystops at the weak market test and does not carry out effective semi-strong form andstrong form Thesis focuses on researching data for the whole VN index, not forindividual stocks

2 Efficient Market Hypothesis Theory

Efficient Market Hypothesis (EMH) theory has important implications in practice aswell as in the theory of the financial sector Economist Samuelson (1965) has said thatfinancial economics is considered the king's jewelry on the occasion of the ritual Themarket theory effectively would account for half of the jewelry

EMH was first introduced in 1900 by Louis Bachelier in his doctoral thesis entitled

"The Theory of Speculation" and since then it has continued to improve Among theauthors of the EMH doctrine are Kendall (1953) and Paul Samuelson (1965).Economists later found evidence related to EMH and by 1960 the random walk theory(a hypothesis about the relationship between past and future prices of goods - or In the1960s, the theory of random walk continued to expand to EMH with the emergence ofthe EMH semi-strong form and strong form

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Efficient market hypothesis was proposed by American scientist F Fama in 1970.Fama argues that stock prices reflect the information contained in it: weak formefficiency, semi-strong form and strong form

2.1 Weakform efficiency

In the first form, a low-performing market is defined as a stock price that adequatelyreflects the weak information of a stock (historical information), including historicalprices, volume In this weak form efficient market, the current price reflects all pastearnings and all information about that stock in the market Therefore, this hypothesismeans that the yields of securities, as well as other information, are not correlated Inother words, investors cannot look for unusual returns with their similar information

in the past This type of efficient market is often found in developing countries oremerging markets

2.2 Semi-strong form efficiency

Market theory is effective at the semi-strong form, assuming stock prices reflect bothpast and existing public information Public information available on the market isstock price, profitability, trading volume Stock prices will adjust immediately afterthe information is published When market performance is at a semi-strong level,there are no predictable price changes This means that investors who make a decisionbased on new information will not receive any unusual profits because the currentprice reflects all of that publicity This type of market usually develops in developedcountries around the world

2.3 Strong form efficiency

The final form of the market is strong form In this market, the price of securitiesreflects all information relevant to it, including past and present, from the public tointernal, even personal information is also reflected The strong form efficient markettheory is the synthesis of both types of effective markets which are weak and semi-strong forms In an efficient market for information at the level of strong form, theinformation provided to investors is the same, they cost the same to obtain thatinformation and bear the same risk No investor has the right to access valuation-related information or use it to make super-profits for themselves, because the market

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reflects the information to investors very quickly, from the information Publicinformation to internal information Therefore, the effective market in strong formrequires the market to collect all the information

EMH is an important financial theory in the foundation of modern financial theory.Fama has identified three test models for EMH:

- The Fair Game Model

- The Sub martingale Model

- The Random Walk Model

2.4.1. The Fair Game Model

The EMH theory is derived from The Fair Game theory, so The Fair Game Model isalso used to test EMH in the stock market The coin toss can also be considered as thesimplest example of this theory because the probability of the face and the back of thecoin is the same More specifically, The Fair Game is a game in which there is nosystematic difference between the actual results and the expected results before thegame takes place Similarly, the stock market will be a fair game if there is nosystematic discrepancy between the actual and expected returns of the stock Inmathematics, it is written by the form below:

P ι ι t+1 : Actual observation of stock at time t + 1

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Z<.<+1 = R,.I+1- E (^) ; E (to) = E [s ,,t+1 - (to)] = 0

E(sr)

: The expected return of stock I at time t + 1 in terms of market aggregationis

2.4.2. The Submartingale Model

This model comes from the Fair Game Model The new model has a small adjustment

to the earnings of the stock The income of securities investors in this model will tend

to increase instead of zero as the previous model Mathematically, it can be written inthe form of the following equation:

Price appreciation is the result of market correction when new information appears onthe market In the market for efficiency, all information is published very randomly;

we cannot predict when there will be new information and what information Because

of this important characteristic in the market efficiency, all methods of forecastingstock prices in the future are completely meaningless

2.4.3. The Random Walk Model

In the stock market, the earnings per share at a given moment are interpreted as thesum of the present value of the income stream that investors will receive in the future

If the market is efficient, the price per share will reflect all the information related tothe situation of the company Any change in share price will affect the earningsstream of the stock Factors that affect stock prices are new information on themarket However, new information or news is unpredictable So the income of thestock will also change with the new information in a way that we cannot predict.Although tomorrow is almost certainly different today, it is also in a completelyrandom way Therefore, according to EMH we have the following equation:

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The equation (*) is defined as the random walk for the price as well as the income ofthe stock Professor Fama pointed out that the random walk model was actually theexpansion of The Fair Game Model If The Fair Game Model emphasizes the market'sequilibrium in earnings per share, the random walk model supports the EMH theorymore strongly than the theoretical methods in The Fair Game Model

2.5 Vietnam Securities Market Overview

Considered the cornerstone of modern finance, Fama's The Efficient MarketHypothesis has become a common concern among investors over the years Thereason is that it partly explains the internal movement of the stock market Theprinciples of The Efficient Market Hypothesis demonstrate the nature of the randomprice change in the market, which is also the attribute of the market index According

to this theory, an effective market is a market in which stock prices fully reflect allinformation related to that stock No one will be able to anticipate what the next day'sstock price will be because people do not know what tomorrow's information will be.Stock prices in an efficient market always reflect the value of it Therefore, all actscontrary to the above rules will not be able to help investors find unusual profits forthemselves (Fama, 1970)

Even so far, there has not been a real-world stock market at the moment, driven by somany different causes and factors But it is a common goal of all stock markets, which

is the perfect model for countries to build their own stock markets

Because of its importance, EMH testing on the stock market in Vietnam will help ushave a more general view of the market, know how the market is moving, developeffectively or are not So, we have timely and appropriate measures to promote themarket more and more effective

The stock market is the optimal channel for mobilizing capital, which plays animportant role in the development of the financial market in particular and theeconomy in general The State Securities Commission (SSC) was established onNovember 28, 1996, starting with the birth of the Vietnam Securities Market The

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stock market in Vietnam officially came into operation in July 2000 (SSC Website).Compared with other developed countries in the world, Vietnam's stock market is stillvery early In the first trading session on July 28, 2000, the Vietnam stock market hadonly two listed companies (cafef.vn) By 2005, the number of listed companiesincreased up to 27 enterprises Until now, Vietnam stock market has experiencedmore than 20 years of operation According to the latest statistics from the StateSecurities Commission (SSC), 2090 companies are listed on the stock exchange ofVietnam, Registered volume as of May 2018 is 125.92 billion shares Average tradingvalue as of June 2018 was VND 14,203 billion (SSC website)

Besides outstanding achievements, the stock market in Vietnam still exists manyinadequacies such as the phenomenon of price manipulation, price manipulation, andviolation of information disclosure On the market, there are many companies thatreported losses, but soon after that, stock prices continued to rise in many sessions.There were a lot of tickers going to the ceiling, down on the floor for dozens ofconsecutive sessions, while there was no supporting information; the issuers justexplained the "supply and demand" on the market So the real question is howsensitive the reaction of securities prices to information on the stock market inVietnam, in other words, Vietnam's stock market is effective or not and effective? Inorder to answer this question as well as explain some of the phenomena happening inthe Vietnam securities market in the current period, I conducted a study on the subject

of "testing the Weak- Form Market Efficiency Hypothesis for Vietnam Stock Marketbetween 2013 and 2017"

3 Literature review

Over the past few decades, most empirical tests have been conducted involving each

of the Random Walk Hypothesis ( RWH) or Weak Form Efficiency (WFE)implications for the stock market in both emerging and emerging markets, Theyproduce different results Most of the early research on WFE theory is based on theRWH random step theory Many studies have examined the effectiveness of the weakmarket by way of income from technical analysis Alexander (1961, 1964) introduced

a flexible trading strategy called "Filter Rule" This rule states that after usinghistorical stock price data, investors should buy the stock if its price increases x%, andkeep it until it decreases by x%, then he has a short sale Investors shifted from buying

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positions when prices rose x% to selling prices Projections using this method wereconducted by Fama and Blume (1966) They use a flexible business strategy (Filterrule) for a fixed period and then compare it with a buy-and-hold strategy If the profitgenerated by a flexible business strategy is greater than the profit generated by thepassive business strategy, the stock market is considered ineffective However, in theopposite case, this could be seen as strong evidence of weak market performance inthe stock market, according to Olowe (1999) The purpose of a flexible tradingstrategy is to allow investors to profit from any systematic trend in the pricemovement of securities over time Thus, Alexander (1961, 1964) and Fama andBlume (1966) concluded that there was an effective weak signal Until the latetwentieth century, research by Fama and Blume (1966) was considered the leadingstudy of business rules Another team tested the stock market's weak performance byexamining the correlation of returns over a time series If random walk theory iscorrect then the correlation coefficient is expected to be zero Cowles and Jones(1937) compared the frequency of numerical strips to test the random walk theoryusing the Runs test Earlier, in Kendall's paper, he concluded that the change in stockprices was almost independent by measuring correlation coefficients Other studies byDimson and Massavian (1998), Osborne (1959), Fama (1965), Fama and Blume(1966) also showed similar results In addition, Osborne (1959) argues that changes inthe price chain are independent of the decision of the investor or that the trading isindependent Fama (1970) observed that these changes in prices were mainly due tothe emergence of new information Because the information is random in appearance,the movement of stock prices also follows the random step Previous studiesconducted in developed countries supported WEF theory with findings of lowcorrelation coefficients Kendall's (1953) study, for example, analyzes the changes inthe stock prices of 22 US consumer securities and the UK industry's share price(1883-1934) He concluded that the price of the stock fluctuated randomly Moreover,Fama's (1965) study of the behavior of the 30 stock indexes of the Down JonesIndustrial Average during the period 1957-1962 used chain testing, autocorrelation,and filtering techniques Alexander He found that the correlation coefficient was verysmall Therefore, it is impossible to seek extraordinary profits from businessstrategies Fama concluded that the Dow Jones Industrial Average was weak Solnik(1973) used 234 stock models of eight major European stock markets from 1966 to

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Table 1: Studies on the weak form of the Vietnam stock market over time _( 2000-2013)

2005

-2005 - 2008

2007 - 2010

2000 - 2009

2000 - 2011

2000 - 2013

2009 - 2012

2013

2009-Truong Dong Loc x

Nguyen Thu Hang x

Nguyen Thi Bao

1971 This author has tested the correlation coefficients for mice, weeks, weeks andmonths for changes in profitability and found small signs of randomness that investorscannot use it for guess the price In addition, Hagerman and Richmond (1973)randomly selected 253 stocks in the US OTC market in 1963-1967 The author alsoconcludes that the market is indicative of the Random Walk theory In addition, aseries of tests also confirmed the random walkway market such as Cowles (1960),Cootner (1962), Mandelbrot (1966), Fama and Blume (1966), Sharp (1966), Fisher(1966), Williamson (1972)

In contrast, some recent empirical studies in developed-capital markets have negatedthe weak-form theory of EMH and predicted stock prices in some areas Lo andMackinlay (1988), for example, tested the theory of random steps by using theVariance ratio test of the weekly return of US securities for the period 1962- 1985.Test results completely reject the Random Walk theory Other tests of the samemethod yielded similar results to the Cochrane (1988) GNP test In other developedmarkets such as Japan, Hong Kong, Australia or Singapore, the test results with thesame methodology suggest that the market is low-performing Most recent studieshave suggested that the findings of weak marketability as well as emerging marketsleave much controversy Because irregular trading, as well as lack of supporting tools,have made stock market more ineffective Havey (1995) argues that the higher thelikelihood of a higher profit margin, the better the stock market is However, this isnot always the case when recent empirical studies show the value of a random walk insome emerging markets First is the Barnes (1986) study of correlation coefficientsand chain tests on the Kuala Lumpur Stock Exchange (KLSE)

Tablel presents 8 studies on the weak form of the Vietnam stock market from 2000 to2013

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Source: National Institute for Finance

“x” is negative for effective market existence, “o” is to confirm the existence of effective markets in Vietnam for the period 2000-2013.

On the Vietnam stock market, there have been some studies on the weak performance

of the stock market However, the results are quite different Research of Thai Long(2004) on VN-Index on HCM Stock Exchange from 2001-2005 The author uses theARIMA method The results of the study have come to the conclusion that the stockmarket is weak Ho Viet Tien (2006) tested the correlation coefficients, tested theseries and tested the profit distribution of stocks on Vietnam Stock Exchange, whichconcluded that the market was ineffective ) correlation and chain testing for listedshares in Hanoi have concluded that Vietnam's stock market is not performing at alow level However, Le Dat Chi (2006) concludes that some stocks follow EMH inweak form Because of the different findings for the Vietnam stock market, I chosethe topic “Testing the Weak- Form Market Efficiency Hypothesis for Vietnam StockMarket from 2013 to 2017" as a research topic

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4 Data

In this article, I use the VN Index It is the index showing the trend of pricefluctuation of all stocks listed and traded on the HOSE The VN-Index compares thepresent market capitalization with the market capitalization on July 28, 2000, the firstday the stock market officially went into operation (HOSE website)

In order to test form efficient market hypothesis for the Vietnamese stock market, Iuse the market return variable of time series defined by the formula:

The everyday showcase log returns are utilized as an individual time series variablefor the vast majority of the testing strategies Daily market returns (Rt) are computedfrom the daily index price, for example:

PI t ʌ

K t = in(ɪ)

rι t-ι

• R t = mark e t re turn in time t

• P I t _ 1 = in d e X V a Iu e a 11 im e t — 1

The impulses to take log returns are legitimized both hypothetically andexperimentally Hypothetically, log returns are logically more tractable whileconnecting mutually sub-period comes back to shape returns over longer interims Inaddition, observationally log returns are more similar to be typically disseminatedwhich is an earlier state of standard factual strategies (A Mobraek, A S Mollah and

R Bhuiyan 2005, N Strong 1992)

The daily closing prices of Vn-Index are taken from the prestige website in Vietnam

is stockbiz.vn for only one period, which is from 2013-01-01 to 2017-12-31 Beforeperforming any time series study by using various methods, I determined somefundamental statistic information for each time series in 4 different ways

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Table 2: Histogram and StatsOften, Skewness = 0 and Kurtosis = 3 will reflect the distribution of observations asnormal distributions According to the diagram above, sknewness = -16.82951;kurtosis = 422.6740 So, this data string does not follow the standard distribution

Asymmetry is the measure of the degree of imbalance of the experimentaldistribution, reflecting the unequal distribution of components in the chain around thecenter of gravity - the arithmetic mean

Skewness> 0, the distribution density has a right deviated tail shape, which ischaracterized by scattering of components with values greater than the arithmeticmean On the other hand, if Skewness <0, the density distribution is left-sided, which

is characteristic for the scattering of components with values smaller than thearithmetic mean Here, Skewness = -16.82951 <0 so the distribution density has theleft-shifted form

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5 Methodologies for Weak Form market Efficiency Testing

The weak form efficiency market is the lowest level of ability to exploit and useinformation of the market At this level, only historical information is fully exploitedand reflected in stock prices

The testing a weak form efficiency market is the test of whether you can use thestock price or yield curve to predict success for a stock price or future rate of return.The test is conducted experimentally because of the statistical dependence betweenthe price changes Without dependency, it is a weak form efficiency market Thatmeans no profitable commercial investment strategy based on price information in thepast Therefore, all the tests on the weak form efficiency market come from thetheoretical random walk test More specifically, the theoretical random walk testdetermines whether a model or rule can be found that can predict the rate of return orprice change based on information in the past or not

5.1 Unit root test

First, we check whether the sequence lnP (t) is stationary or not (corresponding to A =1) according to the unit root method This method looks at the equation:

Y(t) = A * K(t — 1) + u(t); — 1 ≤ A ≤ l,u(t)is white noise

We have the assumption: H 0 : I A I = 1 (n on — S ta t i on ar i tỳ)

H 1 = LAI < 1 (Stationarity)

The equation is equivalent to:

Or H0: a = 0 and H 1 : a, < 0

Dickey Fuller (1979) suggested that the tau estimation of the coefficient a wouldfollow the probability distribution tau (tau = the estimated p value/error of a) Thistest is estimated in three forms:

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Y(t) = +b* +a* Y(t — 1) + u(t) = a * Y(t — 1) + C * X(t) + u(t) (1)

ΔY (t): ΔY(t) = +b*T+a*Y+U (t)+ Y (t - k); k = 1, 2, nα Σ Δ

In addition, in the case of suspicion of chain correlation between u (t), Philips Perron(1988) proposed estimating the equation (1) and modifying the tau value so that thecorrelation where u (t) does not affect tau distribution In addition, the KPSS (1992)test is also used to test Y's (t) stop, but the H_ (0): Y (t) is stationary, which isexpressed by the following equation:

U (t) has constant variance in time q corresponding to the hypothesis ff0: VT? ( q) = 1

However, the limitation of this test is that only the time period q and the choice q aresubjective, whereas if var u (t) does not change over time VR (q) = 1 true with every q

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