ECONOMETRICS TOPIC MONETARY POLICY AND STOCK PRICE VIETNAM STOCK MARKET

The central bank must figure out how monetary variables like inflation, money supply, and interest rates affect stock market performance.. 1.2 Aims and objectives of the study The purpos

HO CHI MINH CAMPUS

ECONOMETRICS TOPIC: MONETARY POLICY AND STOCK PRICE/ VIETNAM

Table of Contents

Table of figure a

Chapter 1 INTRODUCTION 1

1.1 Rationale of the study 1

1.2 Aims and objectives of the study 1

1.3 Research subject: 1

1.4 Research question: 2

1.5 Research structure: 2

Chapter 2 LITERATURE REVIEW 2

2.1 Relationship between Monetary policy and Stock market in the world: 2

2.2 Relationship between Monetary policy and Stock market in Vietnam: 4

Chapter 3 DATA AND METHODOLGY 6

3.1 Regression model: 6

3.2 Variable definition and expectation 7

Chapter 4 RESULTS AND ANALYSIS 10

4.1 Test for multicollinearity 10

4.2 Test for heteroskedasticity 11

4.3 Regression model results: 12

4.3.1 One variable 12

4.3.2 Two variables: 12

4.3.2.1 LINF and LM2 13

4.3.2.2 LINF and LSTI 13

4.3.3 Three variables: 14

Chapter 5 CONCLUSION 15

Table of figure

Figure 3-1 sum LNVI LINF LSTI LM2 10

Figure 4-1 correlate LVN LINF LSTI LM2 11

Figure 4-2 reg luhatsq LM2 11

Figure 4-3 reg LVNT LINF 12

Figure 4-4 reg LVNI LINF LM2 13

Figure 4-5 reg LVNI LINF LSTI 14

Figure 4-6 reg LVNI LINF LM2 LSTI 14

Chapter 1 INTRODUCTION

1.1 Rationale of the study

Monetary policy is the practice of stabilizing the currency through the use of credit and foreign exchange transactions, consequently stabilizing the economy and supporting growth and development The central bank is the body in charge of carrying out monetary policy Price stability, GDP growth, and unemployment reduction are the goals of

monetary policy Monetary policy becomes an effective economic stabilizing instrument for the government since it has the potential to alter the money market, consequently affecting aggregate demand and output

The stock market, often known as the stock exchange, is a venue where investors canissue, buy, sell, and exchange various types of securities This is typically done at thestock exchange or through securities brokerage firms

Nowadays, the relationship between money policy and the stock market has been

researched deeply by many investors and researchers Moreover, stock prices are

assumed to be controlled by a variety of macroeconomic variables such as interest rates, inflation, and money supply, all of which are influenced by various economic policies The central bank must figure out how monetary variables like inflation, money supply, and interest rates affect stock market performance Therefore, in this research, we will focus on analyzing the relationship between these two main factors: money policy and stock market

1.2 Aims and objectives of the study

The purpose of this study is to define the connection between monetary policy variables and stock prices on the Vietnamese stock market using an OLS linear regression model to analyze the impact of stock price fluctuations

1.3 Research subject:

Monetary policy, stock price and stock market in Vietnam as well as the relationship offactors derived from monetary policy and stock prices on the Vietnamese stock marketbased on the use of OLS linear regression model

1.4 Research question:

This research will focus on answering the main question: How will the variables in the model affect the general stock market of Vietnam with other variables related to monetarypolicy?

1.5 Research structure:

The research is included 5 main chapters:

Chapter 1: Introduction - A brief statement about the purpose of the study

Chapter 2: Literature review - Analysis of some relevant published literature

Chapter 3: Methodology and data - Introduction of the model and description of data

Chapter 4: Results - Estimation results are provided in a table and discussed in this

section

Chapter 5: Conclusions

Chapter 2 LITERATURE REVIEW

2.1 Relationship between Monetary policy and Stock market in the world:

The relationship between monetary policy and the stock market performance has been asubject of interest among economists and policymakers over a long period of time Theexisting literature provides a number of theories demonstrating the relation between stockmarket and economic activity proxied by different macroeconomic variables On the basis

of some asset price channels of the monetary policy transmission mechanism, it isgenerally agreed that restrictive monetary policy leads to lower stock prices and

expansionary monetary policy leads to higher stock prices Through monetary policy, theCentral bank not only influences interest rates but also inflation expectations.

An unanticipated rise in inflation may lead to a decline in stock prices, as expectations ofmore restrictive monetary policy will increase To determine the effect of monetary policy

on stock and bond return, Booth and Booth used two variables of monetary policy Thefindings of their study show that a decrease in monthly return of both large and small bondand stock portfolios is associated with a restrictive monetary policy Using monthly datafrom 1971 to 1990, Mukherjee and Naka studied the association between stock prices andmacroeconomic variables including money supply, inflation, index of industrialproduction, exchange rate and interest rates in Tokyo Stock market

Patelis examines whether some portion of the observed predictability is in excess USstock returns can be attributed to shifts in the monetary policy stance He finds thatmonetary policy variables are significant predictors of future returns, although they cannotaccount fully for the observed stock return predictability Patelis’ explanation for thefinding that monetary policy indicators are significant predictors of excess stock returnsrelates to the financial propagation mechanism and to the credit channel of monetarypolicy transmission Jensen and Johnson also find that monetary policy developments areassociated with patterns in stock returns

This argument is based on Waud’s suggestion that discount rate changes affect marketparticipants’ expectations about monetary policy Since rate changes are made only atsubstantial intervals, they represent a somewhat discontinuous instrument of monetarypolicy, and they are established by a public body perceived as being competent in judgingthe economy’s cash and credit needs

French analysis by suggesting that the monetary environment affects investors’ behaviour.The monetary policy stance is proxied by a binary dummy variable indicating discountrate changes find that predictable variation in stock returns depends on monetary as well

as business conditions, with expected stock returns being higher in tight

money periods than in easy money periods They find that stock returns in twelve OECDcountries over the period 1956-1995 are generally higher in the expansive US and localmonetary environments than they are in restrictive environments.

2.2 Relationship between Monetary policy and Stock market in Vietnam:

For some brief on Vietnam’s monetary policy: in the late 1980s, following Doi Moipolicy, Vietnam shifted from a centralized economy controlled by the government to amore open market economy with a “socialist orientation” The new policy encouraged andgave incentives to private businesses and overseas investment, including foreign-ownedenterprises Over 30,000 private businesses had been established by the late 1990s andthere were apparent improvements in agriculture reforms The strategy has proven asuccess as real GDP grew at an average rate of 7.4% from 1991 to 2010, and per capitareal GDP almost doubled from 1993 to 2009 The growth was driven by domesticinvestment, foreign investment and exports The poverty rate also witnessed a declineduring the past two decades (World Bank) Vietnam is expected to grow as one of theimportant industrial economies by 2025 as the country embraces a recent healthy growthpath, a young and educated working population, rich natural resources and its willingness

to develop and internationalize

During the period 2000–to 2015, Vietnam's economy witnessed many strong movements,especially the impact of the crisis in the region and the world This required theGovernment to adopt flexible, effective macroeconomic policies in a timely manner tohelp the national economy overcome difficulties and achieve the targets of growth in eachperiod As a result, the economic growth rate decreased from 8.48% to 6.31% Besides,the prioritized target in this period was to control inflation – a consequence of the increase

in aggregate demand in the previous period

The period 2010–2012 witnessed fluctuations in the stock price Vietnam index due to thesituation in the country and internationally, such as the European debt crisis or highinflation, unstable exchange rates However, the stock market began to recover

powerfully in 2013 when the inflation rate was controlled, interest rates were reduced,foreign reserves increased and the deployment of securities tax-deductible transfersolutions So, 2013 can be considered as an establishment for the stabilization of themarket in 2014 However, many market sessions still declined due to the impact of events

in the South

In 2015, the macroeconomic condition was more positive; however, the stock marketexperienced a fluctuation, the growth of the Index was 5% due to the influence of externalfactors, the strongest ones were the exchange rate fluctuations and the fall in oil prices.Besides those changes, the undeniable growth of Vietnam's stock market after more than

15 years of operation made remarkable progress with a market capitalization of over 1.3million billion dongs, equivalent to 34% of GDP with average trading per session reaching4.964 billion with 682 stocks listed on the two trading centers

Studies have shown that interest has an opposite impact on the stock price At the secondrank, exchange rate policy can help investors to forecast the market change through theexchange rate policies of central banks Some studies also examined the impact of themoney supply on the stock price, it showed a positive relationship between the moneysupply and the US stock market

Existing research into the determinants of volatility of stock exchange highlights suchfactors of monetary policy as interest rate, required reserves, money supply, exchangerate, etc It appears that a frequently applied method to determine the relationship betweenmonetary policy and the stock market is the vector autoregressive model, as in Liljeblomand Stenius, Zakaria and Shamsuddin, and Hussin et al Using VAR, similarly, Al-Raimony and El-Nader identify the cause of Jordan’s market volatility between 1991 and

2010 Accordingly, volatility has been a subject of existing research, yet the study ofconditional volatility has been attracting the attention of many researchers, especiallywhen the world economy experienced wide upheavals Thus, the investigation into stock

market volatility and its determinants is crucial in controlling market risks and contributes

to economic stability and sustainable development

Chapter 3 DATA AND METHODOLGY

3.1 Regression model:

The goal of this research is to establish the relationship of factors derived frommonetary policy and stock prices on the Vietnamese stock market based on the use of OLSlinear regression model to analyze the impact of changes in stock prices How will thevariables in the model affect the general stock market of Vietnam with other variablesrelated to monetary policy? The data sources used were all provided by verified sourcesand reviewed by the research team The time period included in the study was taken fromJanuary 2018 to April 2021 by the research team and includes data related to the variablesused in the paper

Our research model is based on DewanMuktadir-Al-Mukit and A.Z.M Shafiullah(2012) research from Dhaka, Bangladesh (2012) The original regression model isachieved with OLS, consists of 4 dependent variable which are monthly Inflation rate(INF), Broad money supply (M2), Treasury bill (Tbill) and Repo rate (REPO), while thedependent variable Y is DSGEN (Dhaka general index), with the purpose of indicate theoverall situation of the stock market at Dhaka

But due to the lack of information on the REPO rate in the Vietnam market(information security or scarcity in information resources), we decided to deduct thisvariable from the model As for treasury bills, the main purpose of this is to act as a proxy

of short term interest rate, so we instead use the variable “short-term interest rate” TheSample regression function that we inherit from structural models of empirical researcheswill choose VN-Index as independent variable (Y = VNI) and 3 dependent variables (INF,M2 , STI)

VNI= β1 + β2INF + β3M2 + β4STI + Ui (PRF)

VNI = β 1 + β 2INF + β 3M2 + β 4STI+U i (SRF)

In the PRF model, β1 is the intercept of the model which helps the model to operate

functionally, but has no economic meaning β2, β3, β4 are the parameters indicating the

slope of coefficients of variables VNI, M2 and STI Ui is the stochastic error And for the

SRF, we have all estimators of coefficients of the previous PRF model And according to

empirical research ( DewanMuktadir-Al-Mukit and A.Z.M Shafiullah (2012) ), we will

also transform log our model to smoothen out the data and to reduce heteroskedasticity:

LVNI = β 1 + β 2LINF + β 3LM2 + β 4LSTI+U i

3.2 Variable definition and expectation

In this part, we will go into description of each variable in the model and our expected

impact of the dependent variables to the independent variable The table 3.1 will include

the variable full name, unit scale, symbol, explanation and the web source of each

observation:

VN-Index VNI VnIndex shows stock price fluctuations traded at Cafef.vn

Unit: Point Ho Chi Minh City Stock Exchange. Good

indication for overall vietnam stock marketInflation rate of INF The inflation rate is the percentage change in the tradingeconomicVietnam price index for a given period compared to the s.com

(monthly) previous period This will help alert fluctuation in

Unit: % overall price, specifically stock price in this

research

Broad money M2 Broad money supply is the quantity of money ceicdata.com

supply M2 available circulating in an economy controlled by

Vietnam monetary policies This quantity includes all

(monthly) cash, checking deposits, savings deposits and

Vietnam Short- STI Interest rates on loan contracts or debt ceicdata.com

term interest instruments with maturities of less than one year,

rate(monthly) such as treasury bills, bank certificates of deposit,

Table 1 : Summary of variables

And before we go into the results of the research, we will first summarize the

expected impact of each variable to have a bigger scope of comparison to the past

researches In table 3.2, we will go over the sign of impact (positive or negative) and

provide empirical research or past reports that encourage or against the signs of the

coefficients Please take note that this is just a speculation of the effect of the impact and it

will only concern the signs of the effect, not the mass of significance yet

Variable Expected effect to VNI Past research

(2020)Phan Thi Bich Nguyet and Pham Duong Phuong Thao (2013)

ECONOMIC EDUCATORS, 8(2), FALL 2008)

Table 2 : Expected Impact of dependent variables