The dependence between international crude oil price and Vietnam stock market nonlinear cointegration test approach

YOFECONOMICSOFHOCHIMINHCITY HÀTHỊNHƯPHƯƠNG THEDEPENDENCEBETWEENINTERNATIONALCRU DEOILPRICEANDVIETNAMSTOCKMARKETNONLI NEARCOINTEGRATION TESTAPPROACH ECONOMICMASTERTHESIS HoChiMinhCity-201

YOFECONOMICSOFHOCHIMINHCITY

HÀTHỊNHƯPHƯƠNG

THEDEPENDENCEBETWEENINTERNATIONALCRU DEOILPRICEANDVIETNAMSTOCKMARKETNONLI

NEARCOINTEGRATION TESTAPPROACH

ECONOMICMASTERTHESIS

HoChiMinhCity-2015

YOFECONOMICSOFHOCHIMINHCITY

HÀTHỊNHƯPHƯƠNG

THEDEPENDENCEBETWEENINTERNATIONALCRU DEOILPRICEANDVIETNAMSTOCKMARKETNONLI

NEAR COINTEGRATIONTESTAPPROACH

BANKINGCode:60340201

Major:FINANCE-ECONOMICMASTERTHESIS

INTRUCTOR:

Assoc Prof.NGUYỄNTHỊNGỌCTRANG

HoChiMinhCity-2015

Icommitthattheeconomicmasterthesistitling“thedependencebetweeninternationalc r u d e o i l p r i c e a n d V i e t n a m stock market:N o n l i n e a r c o i n t e g r a t i o n t e s ta p

p r o a c h ” w a s madebymyselfwiththedirectionofAssociateProfessorNguyenThiNgocTrang.Thestudy’sresultsaretruthfulanddatawascollectedfromthecrediblesourcessuchas:HoC h i M i n h Citystock e x c h a n g e , E n e r g y Information A d m i n i s t r a t i o n , t

h e S t a t e B a n k o f V i e t n a m andGeneralStatisticsOfficeofVietnam

HoChiMinhCity,October28th,2015Aut

hor

HATHINHUPHUONG

SUBTITLEPAGECOM

MITMENTTABLEO

FCONTENT

LISTOFABBREVIATIONS

LISTOFTABLESLIS

TOFFIGURES

Abstract 1

1 Introduction 2

2 LiteratureReview 7

2.1 LiteratureReview 7

2.1.1 Therelationshipbetweencrudeoilpriceandstockmarket 7

2.1.1.1 Negativeeffectfromcrudeoilpricetostockmarket 7

2.1.1.2 Positiveeffectfromcrudeoilpricetostockmarket 9

2.1.1.3 Insignificantnexusbetweenoilpriceandstockmarket 11

2.1.1.4 TheimperialevidencesabouttherelationshipbetweenoilpricesandV i e t n a m stockmarket 12

2.1.2.T h e relationshipbetweenstockmarketandexchangerate 13

2.2 OverviewaboutVietnamstockmarket,oilsectorandexchangerateregime 17

2.2.1 Vietnamstockmarket 17

2.2.2 Oilsection 19

2.2.3 Exchangeregime 22

3 Dataandresearchmethodology 25

3.1 Data 25

3.2 Methodology 30

3.2.1 GregoryandHansenTest-GHtest 30

3.2.2 Toda-Yamamoto(TY)versionofGrangernon-causalitytest 32

3.2.3 ErrorCorrectionModel 34

4 Researchingresult 36

4.1 Descriptivestatistics 36

4.2 Unitroottest 41

4.3 GregoryandHansenTest-GHtest 45

4.4 TYprocedureofGrangernon–causalitytest 46

4.5 Errorcorrectionmodel 49

5 Conclusion 51 ReferencesAppendice

s

Table3.1Variabledescriptionsandsources: 30

Table4.1Descriptivestatisticofthreevariables,exchangerate,crudeoilpriceandVN indexfortheentiresample 38

Table4.2Descriptivestatisticofthreevariables,exchangerate,crudeoilpriceandVN indexforfourphases 40

Table4.3Unitroottest resultforentiresample 43

Table4.4Unitroot test resultforfourphases: 44

Table4.5Thresholdcointegration results 45

Table4.6CriticalvaluesofGHtestwithsignificantlevelat5%and3regressors 45T a b l e 4.7 TYversionofGrangernon–causalitytests 48

Table4.8Errorcorrectionmodel 49

LISTOFFIGURES Figure1.1Globalcrude oilandpetroleumliquidsconsumption,supplyandin ventoryin2014 and 2015(Source:EnergyInformationAdministration) 2

Figure1.2Crudeoilexportrevenuesandproductionsfrom2009to08monthsof2 015(source:General Statistics OfficeofVietnam) 4

Figure2.1VietnamStockmarketcapitalizationtoGDP(%)from2004-2014( S o u r ce FederalReserveEconomicData) 18

Figure2 2 P r o p o r t i o n o f s e c t o r a l marketc a p i t a l i z a t i o n i n 2 0 1 5 ( s o u r c e : H O S E web si te) 19

Figure2.3Averageinterbankexchangeratesfrom2006to2015 23

Figure3.1 Graphicalpresentationoftheseries forfirstphase 26

Figure3.2Graphicalpresentationoftheseriesforthesecondphase 27

Figure3.3 Graphicalrepresentationofthethirdphase 28

Figure3.4 Graphicalrepresentationofthefourthphase 29

Figure3.5 Graphicalrepresentationoftheentiresample 29

Abstract

ThispaperinvestigatestherelationshipbetweencrudeoilpricesandVietnamstockpr icesbyusingthedailydataintheperiodfrom01/03/2006to08/31/2015.Thedataisd i v i d e d i n t

o f o u r p h a s e s , c o r r e s p o n d i n g tot w o i m p o r t a n t e v e n t s , t h e f i n a n c i a l c r i

si s in2007andthesignificantdeclineofcrudepricesfrom thethirdquarterof2014.TheresearchmethodsemployedarethethresholdcointegrationtestofG r e g o r

y a n d H a n s e n ( 1 9 9 6 ) , T Y p r o c e d u r e f o r G r a n g e r n o n

-c a u s a l i t y p r o p o s e d

Toda-Yamamoto(1995)andErrorcorrectionmodel(Granger,1987).Theresultss h

o w thatthereexistsalongrunrelationshipbetweencrudeoilpricesandVietnamstockmarketintheentiresample;however,thereisnocointegrationbetweenthesevariablesinallfourphases.Thereisevidencethatcrudeoilpricesunidirectionallya f f e c t stockpricesintheentiresampleandinthesecondandthirdphase;andthecrudeo i l p

r i c e v a r i a b l e i s a n e x o g e n o u s o n e I n thel a s t p h a s e a t t a c h e d w i t h t h e declineo f c r u d e o i l p r i c e s , n o e v i d e n c e i n s t a t i s t i c showst h a t theo i l p r i c e s

d o Gran g e r ca use t o st oc k p r i c e s I t l i k e l y p r o v e s th at v o l a t i l i t i es o f w o r l

d c r u d e oi lp r i c e s canaffectnegativelyorpositivelytoprofitoutlooksofthelistedcompanieso n Vietnamstockmarket,andthereisabalancebetweenbenefitsanddamagesint h is period.ECM modelindicatesthatoi lprices andstockprices ha v

e apositive r e l a t i o n s h i p inshortterm,andthespeedofadjustmentofstockpricetoreturntheequi libr iu m stateafterashockisslowaround0.25%.Thesefindingsalsohaveanimportantp o l i c y implicationthath e l p s t h e governmenti n t e r c e

p t t h e m a r k e t t o r e d u c e thenegativeeffectfromtheenergyshocksingeneralandoilpriceshocksinparti cul ar Thosearetopaymoreattentiontodomesticproductionandtraderevenuest o g e t mores t a b l e b u d g e t , r e s e a r c h t h e a l t e r n a t i v e e n e r

g y a n d e n h a n c e internationalcooperationintheenergysector

Keywords:Oilprice,stockmarket,thresholdcointergration.

1 Introduction

Theoilcrudepriceshasfallenlessthan$50perbarrel,about50%ofAugust2015.Themainreasonistheoilsupplymorethandemand(seethefigure1).Growingoilinventoriesandsupply typicallyputdownwardpressureonnear-

termprices.The U n i t e d Statesdiscoveredandappliedthenewoildrilltechnology,called“shaleoilrevolution”.This pushestheoilproductionisnear10millionbarrelsperday.S o t h a t itcanbeoffsetthesubstantialoilsupplydisruptionintheOrganizationoftheP e t r o l e u m E x p o r t i n g C o u n t r i e s ( O P E C ) H o w e v e r , t h e

r e s u m p t i o n o f s i g n i f i c a n t Libyanoilproduction,combinedwiththeweakeningoutlookforglobaloildemand,t h e largeeconomiesinthewordsuchasChina,Russia,Europeareashownotgoodperformancesaboutindustrialproductionandexpectationforeconomicgrowth

m United St at esan d European U n i o n n ucl ear

re lat edsa nc ti ons ( w h i c h in cl ude someo i l

-r e l a t e d s a n c t i o n s ) I f t h e a g -r e e m e n t i s i m p l e m e n t e d a n d s a n c t i o n s -r e l i e

f occur s, itwillputadditionalIranian oilsupplies ona globalmarketthat hasalready

i s t e d c o m p a n i e s o n Vietnams t o c k m a r k e t T h e c o m p a n i e s h a v e i n p

u t s f r o m t h e o i l w a s t e p r o d u c t s ( su ch a s P L V

P e t r o l i m e x P e t r o c h e m i c a l C o r p o r a t i o n , B M P

-B i n h M i n h P l a s t i c J o i n t StockCompany, )andothercompanieshaveinputcomingdirectlyfromthepetroleumsector(PVT-

Energy,inparticularcrude oilhasplayedanimportantrole inoureconomy Th

ep u r p o s e ofthisstudyistoinvestigatetherelationshipbetweencrudeoilpriceandVietnams t o c k market.I n t h i s p a p e r , I

w i l l a n s w e r t h i s q u e s t i o n f r o m s e v e r a l p e r s p e c t i v e s :

(i)

Doesitexistalong-runrelationshipbetweencrudeoilprices,stockpricesandexchangesratesinentiresample?

(ii) Dothebigworldeventssuchasthefinancialcrisisin2007andthetechnologyshockcalled“shaleoilrevolution”affecttotheco-movementofthethree?

(iv) CantheexchangeratesdoGrangercausetostockprices?

(v) Isthecrudeoilpriceanexogenousvariable?

(vi) Howdoestheimpactofcrudeoilprices,exchangesratesonstockprices?

AndHo w adjustedspeedofstockpricestoreturntheequilibriumifhavingashockinpr esen t?

F2a.Crudeoilexportvalue( u

n it : 1billiondollars) F2b.Crudeoilexportproduction( u

n i t : $1billionton) Figure1.2Crudeoilexportrevenuesandproductionsfrom2009to08monthsof2015(source: GeneralStatistics OfficeofVietnam).

Thestudywillprovideinvestorsthemarketoutlookinthefuturebeforetheoilpricef l u c t ua t i

o n s inthepresent.Therefromtheinvestorcanmaketheappropriateh e d g in g s t r

a t e g i e s a n d d i v e r s i f i c a t i o n S p e c i a l l y , f o r a c o u n t r y w h i c h t h e f o r e i g ncurrency primarilycomesfromexportingnaturalresourcessuchascoals,oil…

likeu s , thenthestrongoilpricevolatilitieswillsnappilyimpactitsinternationalb a

la n c e s, budgetdeficitsandeconomicgrowthrates.Throughthisstudy,Ihopetop r o

v i d e furtherevidencesabouttheenergyimportancetotheeconomyandsuggestsolutionsthatgovernmentcanintercepttoreducemarkervolatilities

Thestudyusesthedailydatawiththeperiodspanningfrom01/03/2006to0 8 / 3 1 /

2 0 1 5 Year2006chosenisthebeginningstudyyear,becauseVietnamstockmarkethasjusthadstepsonobviousdevelopmentinnumbersoflistedcompaniesan dtra

entiresamplesisd i v i d e d into04phases,thefirstphasefrom01/03/2006to12/28/2007,thesecondp h a s e f r o m 0 1 / 0 2 / 2 0 0 8 t o 1 2 / 3 1 / 2 0 0 9 , t h e t h i r d p h a s e f r o

m 0 1 / 0 4 / 2 0 1 0 t o 0 6/ 30/2 014andthe lastphasefrom 07/01/2014 to08/31/2015,attaching withthesignificantdeclineinoilpricessincethebeginningofJuly2014duetoexcessiveoils u p p l y whiletheworldeconomyisstillgloomyandhasnotyetrecovered.Thresholdc o i n t e g r a t i o n t e s t o f G r e g o r y a n d H a n s e n ( 1 9 9 6 ) ise m p l o y e d

t e s t t h e

long-termr e l a t i o n s h i p o f o i l p r i c e s , e x c h a n g e r a t e s a n d s t o c k p r i c e s

F r o m t h e r e s u l t ’ s GHtes ti nd ica tet he ree xis ts the l o n g ru n ne x u s be tw ee

nt hese var ia bl es Interestinghowever,thenullhypothesisofnocointegrationcannotrejectatsignificantlevel5%inallfourphases.Thisdoesprovethateventsintheresearch

s t a g e

impactthelong-termstructureofoilpricesandthestockmarket.Theinterruptionsmakethemimpossibletoreachtheequilibriuminthelimitedtimeofsubsample

UsingtheT-YversionofGrangernon-causalitytestproposedbyToda-Yamamoto( 1 9 9 5 ) showsthatthereexistsaunidirectionalrelationship,runningfromoilpricestostockpricesintheentiresample,andthesecondandthirdphase.Theseareinand

a f t e r t he 2 0 0 7 f i n a n c i a l c r is i s I n c o n t r a s t t o m y expectation, t he c r u d e o i

l p r i c e s insignificantlycauseGrangertostockpriceinthelastphase.Theeffectsofoilpriceo

n stockmarketmaybeneedseverallagsandthisphaseisnotlongenoughtoseethem.Besidesthat,someindustriestakebenefitsandsomeindustriesbeardamagesf r o m thede c l i n e of o i l p r i c e s, maybet h e re h a s t h e bal anc e b e t w ee n be ne fi ts an d damagesinthisperiod

ErrorC o r r e c t i o n M o d e l indicatest h a t o i l p r i c e s a n d s t o c k p r i c e s h a v e a p o s

i t i v e r el a t i o n s h i p in shortterm.The reasonmaycomefromtheoilindustry’sstockshave

f oilpriceswillleadthesestocksofthesecompaniesplummet,marketsentimentint h e shorttermpushthemarketindexdecrease.However,theexchangeratesdon’ta f f e c t thestockmarketintheshortterm.Thespeedofadjustmentofstockpricetoreturntheequilibriumstateafterashockisslowaround0.25%

Thestudyalsosuggestsomepoliciesthathelpthegovernmentinterceptthemarkettored uce thenegativeeffectfromtheenergyshocksingeneralandoil

priceshocksi n particular.Thosearetopayingmoreattentiontodomesticproductionandtrader e v e n u e s t o g e t mores t a b l e b u d g e t , r e s e a r c h t h e a l t e r n a t i v e

e n e r g y a n d e n h a n c e internationalcooperationintheenergysector

Theoutlineofthisstudyisstructuredasfollow:Section1introduction;sectio

overallaboutVietnamstockmarket,oilsector,andExchangeregime;section3dataandresearchmethod;section4researchingresulta n d section5 conclusion

2 LiteratureReview

Therea r e m a n y p a p e r s i n v e s t i g a t i n g o n t h e r e l a t i o n s h i p b e t w e e n o

i l p r i c e s a n d stockp r i c e s H o w e v e r , t h e r e s u l t s o f s t u d i e s a r e n o t

c o n s i s t e n t ; t h e d i f f e r e n c e s depend onthefeaturesofeacheconomy.Iclassifytheliteraturereviewofthenexusb e t w e e n s t o c k p r i c e s a n d o i l p r i c e s intot h r e

s t a t e s ( b u l l markets vs bearmarkets)to characterizethe fluctuations inthestockmarketa n d t o i d e n t i f y t h e i m p a c t o f o i l p r i c e s o n t h e s w i t c h i

n g b e t w e e n stages.Theempiricalevidencesshowthatanincreaseinoilpricesleadstoahigherp r o b a b i l i t y ofabearmarketemerging

Juncala n d F e r n a n d o ( 2 0 1 3 ) e x a m i n e t h e impacto f o i l p r i c e s h o c k s o

n s t o c k r e t u r n s in12oilimportingEuropeaneconomiesusingVectorAutoregressive( V A R ) a n d V e c t o r E r r o r C o r r e c t i o n M o d e l s ( V E C M ) f o r t h e p e

r i o d 1 9 7 3 M 2 –

20 11 M12 Theoilpriceshockswasdividedinto02kinds,theyareoilsupplyandoild e m a n d s h o c k s , w h i c h a r e measuredbyw o r l d o i l p r o d u c t i o n a n d w

o r l d o i l p r i c e s respectively.Moreover,thereareotherexplanationvariablesaddedtomod

elss u c h terminterestratesinordertoexpress

asindustrialproductionindexes,short-differentc h a n n e l s t h r o u g h w h i c h o i l p r i c e s c o u l d a f f e c t s t o c k r e t u r n s

T h e mainco n t r ib u t io n i s i d e n t i f i c a t i o n t h a t s t o c k r e t u r n s mayr e s p o n d in

d i f f e r e n t wayst o supplyanddemandshocks.Theoilsupplyshockstendtohaveagreaternegativei m p a c t ons t o c k m a r k e t r e t u r n s t h a n o i l d e m a n d s h o c k

s Generally,t h e o i l p r i c e ch a ng e lowerseconomicactivityi n oilimportingeconomiesbecauseofmoree x p e n s i v e energyinputs.However,iftheincreasecomesfromdemandshock,theneconomica c t i v i t y i n o i l i m p o r t i n g e c o n o m i e s c a n b e i m

n t e r e s t r a t e a r e e x o g e n o u s v a r i a b l e s T h e r esu l t ofpapershowsthatthereexiststhelong–runandstablerelationshipbetweenf o u r variables,especially,oil

as:oilsupply,aggregate

demand,oilmarket-specificdemand,andcovarianceofreturnandvolatility.Positiveshockstoaggregatedemandandtooil-marketspecificdemand

areassociatedwithnegativeeffectsonthecovarianceofreturnandvolatility.Anunanticipated r e d u c t i o n i n c r u d e o i l p r o d u c t i o n i s a s s o c i a t e d

w i t h a s t a t i s t i c a l l y

significantincreaseimplied-covarianceofreturnandvolatility.Thespilloverindexbetween thestructuraloilpriceshocksandcovarianceofstockreturnandvolatilityislargeandhighlystatisticallysignificant

2.1.1.2 Positiveeffectfromcrudeoilpricetostockmarket

Zhuetal.(2013)researchesonstructuraldependencebetweencrudeoilpricesandAsia-Pacificstockmarketreturns.Therearemanydifferentapproaches, however,traditionalapproachessuchasVARorVECMrequirevariablesfollownormalorStudentt-distributions.Furthermore,itis

wellknownthattraditionalmeanvarianceoptimization analysisp o r t f o l i o s a re s y m

m e t r i c measurest h a t can no t c a p t u r e

non-l i n e a r dependenceorchangesinthetainon-lsofassetreturncurvesandthatinvestorspayc l o s e r a t t e n t i o n t o d o w n s i d e t h a n t o u p s i d e r i s k T h e modelp r o

p o s e d i s t h e

copula-GARCHmodels.ThedatasetincludesdailycrudeoilpricesandtenAsia–

P a c i f i c countries'stockreturnsfromJanuary4,2000toMarch30,2012.Thedataisdividedintotwosubsamplesreferredtoaspre-

crisis(January4,2000to23September2 0 0 8 ) a n d p o s t

-c r i s i s ( S e p t e m b e r 2 4 , 2 0 0 8 toM a r -c h 3 0 , 2 0 1 2 ) , r e s p e -c t i v e l y toexploredifferencesofthedependencebetweenphases.Theresultssh owthatthedependencebetweencrudeoilprices andAsia-

Pacificstockmarketreturnsisg e n e r a l l y w e a k , t h a t i t w a s p o s i t i v e b e f o

r e t h e g l o b a l f i n a n c i a l c r i s i s , excepti n H o n g K o n g , a n d t h a t i t i n c r e a

s e d s i g n i f i c a n t l y i n t h e a f t e r m a t h o f t h e crisis.Theyfoundthatthetaildependencewasveryweakbeforethecrisisandthatthelowertaildependencewasmuchhigherthantheuppertaildependenceafterthec r i si s , exceptinthecasesofJapanandSingapore

Moya-Martínezetal.

( 2 0 1 3 ) examinesoilpricesensitivityofSpanishindustriesfort h e p e r i o d J a n

u a r y 1 9 9 3 t o D e c e m b e r 2 0 1 0 D a t a s e t i n c l u d e s w e e k l y o b s e r v a t i o n s

o f s t o c k marketr e t u r n s ( p r o x i e d byi n d i c e s G e n e r a l d e l a B o l s a deMadrid),weeklyreturnsof14industries,t h e DatedBrentcrudeoilpricesa n d

interestrates.Amultifactormarketmodelisus e d toinvestigate theimpactofoilpricechangesonindustrystockreturnsandisestimatedforsub-

samplesbasedont h e b r e a k p o i n t s i d e n t i f i e d byB a i a n d P e r r o n multiples t r

u c t u r a l b r e a k tests.T h e r e s u l t indicatesthattheexposureofSpanishindustriestooilpriceisratherlimited,althought h e o i l p r i c e e x p o s u r e isd i f f e r e n t c o n s i d e r a

b l y b e t w e e n i n d u s t r i e s T h e e x p o s u r e wasverysmallinthe1990s,periodoffairlystableandcheapoilprices.Itincreasesinthe2000swithhigherandmorevolatileoilprices.Becauseaggregated e m an d -

theGulfCooperationCouncil(GCC)nations.Usingfirm-h 3 1 , 2 0 1 3 s u c theGulfCooperationCouncil(GCC)nations.Usingfirm-h a s stockprice,numberofstheGulfCooperationCouncil(GCC)nations.Usingfirm-haresandbookequitydata,combinewithexchange rate,three-monthU.S.TreasuryBillrateastherisk-

freerate,andBrentcrudeoilprices.T h e r e s u l t s i n d i c a t e t h a t s t o c k s t h a t a r

e m o r e s e n s i t i v e too i l p r i c e f l u c t u a t i o n s i n d eed yieldsignificantlyhigherreturns,suggestingthatoilpriceriskexposurecanserv e asareturnpredictorinthesestockmarkets.Interestingly

0 1 t o D e c e m b e r 2 0 1 0 i n c l u d i n g m o n t h l y r e a l o i l p r i c e , t h e r e a l s t

o c k p r i c e indicesfort h e 13majorsectorsa n d a c o n t r o l l i n g v a r i a b l e , i n t

e r e s t r a t e T h e i r

findingsshowthatthereexista positive relationshipbetweenoilpricesandsectoralstockpricesinthelongrun.Itmayalsoindicatethattheimpactofothersubstituteenergysources(e.g.,coal)orotherinternalanddomesticfactorsonthesesectorals to c k s a r e mored o m i n a n t t h a n t h e i n c r e a s e i n oil

Australia,Canada,France,Germany,Italy,Japan,theUnitedKingdom,andtheUnitedStates–spans1981to2007andVARmodel.Theresultss h o w thatdifferentoil-

marketstructuralshocksplayasignificantroleinexplainingt h e marketreturns.But,themagnitudeofsucheffectsprovessm al l T h e o i l -

dem an d shocksdonotasaruletemporallyleadthestock-marketreturn

(2010)testfortheefficientmarkethypothesisinthesixGulfCooperationC o u n c i

l ( G C C ) c o u n t r i e s e q u i t y m a r k e t s —namelyB a h r a i n , K u w a i t ,

Qatar,Oman,SaudiArabia,andtheUnitedArabEmirates.Thedatasetusedinthiss t u d y

c o n s i s t o f d a i l y o b s e r v a t i o n s o f t h e S t a n d a r d & P o o r ' s ( S & P )

E m e r g i n g M a r k e t IndexesforsixcountriesfortheperiodApril03,2006throughMarch28,2 00 8a n d t w o b e n c h m a r k i n d e x e s f o r o i l a n d g o l d S i n c e t

h e d a t a i s nonnormalwitht i m e

-v a r y i n g -v o l a t i l i t y , t h e a u t h o r s a p p l y a n e w m e t h o d o l o g y b a s e d o n t h

e leveragebootstrappedsimulationtechnique.T h e c a u s a l i t y t e s t r e s u l t s r e v e a l t

h a t n e i t h e r theoilpriceindexnorthegoldpriceindexcausestheequitypriceindexesofthesixGCCmarkets.ThismeansthattheinformationcontainedinthegoldandoilpriceindexescannotimprovetheforecastoftheequitymarketindexineachofthesixGCCstates.Thus,thepossibilityofshort-

termarbitrageisruledoutandthesixGCCequitymarketscanbeconsideredasinformationallyefficientwithrespecttooilandgoldprices

Indexandthecrudeoilprice.T h e evidencesfromthebivariatecointegrationtestshowthatthereexistthelong-

runrelationshipbetweenVNindexandcrudeoilpricesinthe

wholeperiodsandtheseconds u b

p e r i o d Int h i s s u b p e r i o d , t h e r e o n l y e x i s t t h e l o n g r u n

-r e l a t i o n s h i p b et weenVNindexandexchange-rate.The-resultsofG-rangecausalitytestsfindaun id irect io nal relationshiprunningfromoilpricestothestock

marketintheentirepe r i od a n d t h e f i r s t s u b

-p e r i o d A d d i t i o n a l , t h e r e i s a u n i d i r e c t i o n a l r e l a t i o n s h i -p r u n n i n

g fromExchangeratetothestockpricesinthefirstsub-period

Narayanan d N a r a y a n (2 01 0) modelt h e i m p a c t o f o i l p r i c e s o n s t o c k p r i c e s

i n

Vietnamstockmarket.Thestudyusesthedailydataforperiodfrom2000-2008ofsto ckprices, nominale x c h a n g e r a t e s a n d o il p r i ce s U s i n g th e c o i n t e

breakcointegrationtestsfindsthereexiststhel o n g runrelationshipbetweenstockmarket,oilpricesandexchangerates.Runningt h e long-

runelasticities,theauthorsfindthatoilpricesandexchangerateshaveapositiveandsignificanteffect onstock prices.However, theresultis inconsistentwiththetheoreticalexpectations.Becausetheythinkthattherearesomedifferentfactorsc o n t r i b u t i n g t o t h e s t o c k m a r k e t b o o m i n t h i s p e r i o d s u c

h a s i n c r e a s i n g fo r eig n portfolioinvestmentcapitalflowsandlocalmarketparticipants.Thestudya l s o combinesthelong–runmodelwiththeshort-

runmodelbyusingerrorc o r r e c ti o n model.Theresultsshowthedeterminantsofstockpricesarestatisticallysignificantinthelongrunandtheyareinsignificantintheshortrun

NguyenandIshaq(2012)studythedependencestructuresand/

ortaildependenceb e t w e e n oilpricechangesandstockmarketindices.T h e taildependencehelpstodeterminewhetherthetwovariablesmovetogetherinthesameoropposited i r e c t i o n s Thispaperemploystworelativelynewmethods,namelythePlots( K e n d a l l or K p lo t a n d chi p l o t ) base d o n n o n p a r a m e t r i c m e t h o d a n d t

he co pu la, basedonparametricmethod.ThedailydatasetsincludeWTIcrudeoilpricesandstockpricesfromChinaandVietnam.Thestudy

periodinVietnamisfrom2002toA u g u s t 2009andinChina isfrom2000toAugust2009.TheresultsshowthatthereislefttaildependencebetweeninternationaloilpricechangesandVietnam’sstockmarket,meaningthatiftheinternationaloilpricedecreases,Vietnam’sstockmarketwi ll a ls o d ec r e a se a cc o r d i n g l y W h i l e th ere is noevi de nce showing t h a t taildependenceintherelationshipofinternationaloilpricechangesandCh ina’ s stockmarket

2.1.2.T h e relationshipbetweenstockmarketandexchangerate

l firm,a c h a n g e i n e x c h a n g e ratewillchangethevalueofthatfirm’sforeignoperation,whichwillber eflected on i t s ba l a n ce s h ee t a sa p r o f i t o r a l o s s Co nsequen tl y itco n t r i b u t e s tocurrentaccountimbalance.Oncetheprofitoralossisannounced,thatfirm’sstockp ri c e willchange.Thisargumentshowsthatdevaluationcouldeitherraiseorlowera firm’sstockpricedependingonwhetherthatfirmisanexportingfirmoritisah e av y userofimportedinputs.Ifitinvolvesinbothactivities,itsstockpricecouldmoveineitherdirection.Thisistrueespeciallywhenmoststockpricesar

ea g g r e g a t e d toi n v e s t i g a t e t h e e f f e c t s o f d e v a l u a t i o n o n s t o c k m a r k e

t s F r o m t h i s viewpoint,exchangeratechangeisexpectedtogiverisetostockpricechange.Suchacausalrelationisknownasthetraditionalapproach

wealthofdomesticinvestors,whichinturnleadstoalowerdemandformoneywithe n s u i n g l

o w e r i n t e r e s t r a t e s T h e l o w e r i n t e r e s t r a t e s e n c o u r a g e c a p i t a l outflowsceterisp a r i b u s , w h i c h i n t u r n i s t h e c a u s e o f c u r r e n c y d e p r e c i a

t i o n U n d e r t h e a s s u m p t i o n oftheportfolioapproach,stockpriceisexpectedtoleadexchangeratewith anegativecorrelation.Ifamarketissubjecttotheinfluencesofbothapproachessimultaneously,afeedbackloop willprevail withana r

seriesareappliedtoexaminetheintertemporalrelationbetweens t o c k indicesandexchangeratesforasampleof8advancedeconomies.Anerrorcorrectionmodel(ECM)ofthe2variablesisemployedtosimultaneouslyestimatet h e s h o r t -

r u n a n d l o n g

-r u n d y n a m i c s oft h e v a -r i a b l e s T h e ECM-r e s u l t s -r e v e a l significantshort-runandlong-

runfeedbackrelationsbetweenthe2financialmarkets.Specifically,theresultsshowthatanincreaseinaggregatedomesticstockp r i c e hasanegativeshort-

runeffectondomesticcurrencyvalue.Inthelongrun,however, i n c r e a s e s

i n s t o c k p r i c e s h a v e a p o s i t i v e e f f e c t o n d o m e s t i c c u r r e n c y

i o n s h i p w a s f o u n d i n t h e c a s e o f Philippines

Ajayietal.

(1998)examinetheinteractionbetweendailystockreturnsandchangesi n theexchanger

atesfortwogroupsofmarkets:Advancedeconomies(includingCanada,Germany,France,Italy,Japan,UK,andUSA)whosedatastartfromApril1 9 8 5 toAugust1991andAsianemergingmarkets(includingTaiwan,Korea, t h e Philippines,Malaysia,Singapore,HongKong,Indonesia,andThailand)whosedatac o v e r December1987toSeptember1991.InthecaseofIndonesia,thePhilippines,T aiwan,a n d a l l a d

v a n c e d markets,t h e r e i s o n e

-w a y c a u s a l r e l a t i o n s h i p r u n n i n g f r o m thestockmarkettotheFXmarket,-whil

therelationshipi s reverse.Theyalsoperformcausalitytestonweeklydataandfindthattheresultsare inlinewiththedailydatafortheadvancedmarkets.However,averydifferentr e s u l t isobtainedforemergingmarkets:unidirectionalcausalrelationshipfromthes t o c k returnsdifferentialtothechangeintheexchangerateisfoundforThailandandMalaysia

(2000)applyGrangercausalitytestandIRFtoexaminetheinteractionbetweenstock

pricesandFXmarket.NineAsiancountriesandregionsa r e selectedfortheempiricalanalysis:HongKong,Indonesia,Japan,SouthKorea,Malaysia,thePhilippines,Singapore,Thailand,andTaiwan.Their studyemploysd a i l y datafrom3January1986to14November1997(3097observations).Three sub-

periodstartedf r o m thefirstobservationto30November1986;thesecondperiodextendsfrom1December1987totheendof1994anditiscalledaftercrashperiod;andthethirdo n e coverstherestobservations.Inthefirstperiod,byusing10%assignificancelev el , thereisnocausallinkageforthosecountriesexceptHongKongandSouthKo r ea, whichhaveone-

waycausalityfromexchangeratetostockpriceandfromstockp r i c e t o e x c

h a n g e r a t e , respectively.I n p e r i o d 2 , t h e

a u t h o r s f i n d u n i d i r e c t i o n a l causallinkagefromFXmarketstostock marketsinMalaysiaandthePhilippinesandreverselinkageinTaiwan.Duringthelastperiod,itisfoundthatt h e changeinstockprices willleadthechange intheexchangeratesinTaiwan,andt h e reverserelationshipisfoundinJapan,Thailand,Singapore,andHongKong.Intherestmarkets,bidirectionalcausalrelationshipsbetweenthetwovariableswereestablished.Moreover,the studyshowsthatthepredictableportionofstockpricec h a n g e s c a n b e i m p r o v e d byincluding the exchangeratevariation within theregression

31.50 31.00 30.00

25.00

20.00 18.05 17.17

16.25 15.95

14.16 14.07 15.00

10.00

7.06 5.00

0.61 0.41

0.00

2004200520062007200820092010 2011201220132014

theHoChiMinhStockExchange(HOSE)andt h e HanoiStockExchange(HNX).HOSEismostlydedicatedtoequitiestrading,whileHNXtradesequities,bondsandoverthecountersecurities

HOSEwasinitiallyestablishedastheHoChiMinhCitySecuritiesTradingCenter(H

oS T C) in2000.Itwas laterupgradedan drenamedin2007.PriortoMarch1st2 0 0

2 ,shareswereonlytradedonalternatedays.TheVietnamequitiesmarkethascomealongwayinashorttime.InJanuary2006,therewereonly34companiesl i s t

e d onHOSE;thishasincreasedto303in2012,withthemarketcapexpandingfromUSD1.1billionin2006toUSD29.9billionin2012.In2015,thereare600-

700companieslistedonHOSEwiththemarketcapitalofUSD60billion

Figure2.1showsthemarketcapitalizationtoGDPfrom2004to2016.Thisratiosignificantlyincreaseso v e r year-to-year.I n 2 0 1 3 -

2 0 1 4 , t h e m a r k e t c a p i t a l i z a t i o n a c c o u n t e d about31%GDPandincreased24%comparedto2006.However,comparedwithotheremergingmarketssuchasChina,India,andSouthAfrica,thenV i e t n a m stockmarketisrelativelylessdeveloped

Figure2.1VietnamStockmarketcapitalizationtoGDP(%)

from2004-2014(SourceFederalReserve EconomicData)

Banking-insurance 19%Food 32%Real estate 4%Contruction 6%Electricity/ gas Energy 6%Oil industry 7%14%Transportantion 12%Others

Figure2.2Proportionofsectoralmarketcapitalizationin2015(source:HOSEwebsite).

Figure2 2 e x p r e s s e r t h e p r o p o r t i o n o f s e c t o r a l marketc a p i t a l i z a t i o n

i n 2 0 1 5 Its h o w s thatoilindustryhasthefifthpercentageofmarketcapitalizationabout6%.Therefore,thevolatilitiesinworldoilpricesmayhaveanimmediateimpactonthemarket

2.2.2 Oilsection

naturalgasproducerinSoutheastAsia.Vietnamhasboostedexplorationactivities,allowedforgr eat er foreigncompanyinvestmentandcooperationintheoilandgassectors,andintroducedmarketreformstosupportthee n e r g y industry.Thesemeasureshaveh e l

p e d t o i n c r e a s e o i l a n d g a s p r o d u c t i o n A l s o , t h e c o u n t r y ’ s r a

p i d e c o n o m i c growth,industrialization,andexportmarketexpansionhavespurreddomesticenergy consumption

Recent,successfuloffshoreexplorationhascontributedtoasubstantialincreaseinprov ed crudeoilreserves,whichgrewto4.4billionbarrelsasofJanuary2012from

0.6billionbarrelsin2011,accordingtotheOilandGasJournal.Reservesremaineda t 4.4billionbarrelsin2013and2014.Ongoingexplorationactivitiescould

increasethisfigureinthefuture,asVietnam’swatersremainlargelyunderexplored.V i e t n a

m

iscurrentlythethird-largestholderofcrudeoilreservesinAsia,behindC h i n a andIndia

Vietnam,thePhilippines,Malaysia,C h i n a , Taiwan,a n d Bruneieachc l a i m sovereignt

hasr e a c h e d agreements withseveral ofitsneighborsto conductjointexplorationforoila n d naturalgasresourcesintheregion.DisputeswithChinaareyettoberesolved

A s recentlyasMay7th,

2014,tensionsbetweenChinaandVietnamflaredfollowinga skirmishoveraChineseoilrigthatVietnamclaimswasplanningtoillegallydrilli n t o theVietnam'scontinentalshelf.Inaddition,onSeptember15,2014,Vietnama n d I n d i a a g r e e d t o e x p a n d j

o i n t u p s t r e a m o i l a n d g a s a c t i v i t i e s int h e c o n t e s t e d wat er s oftheSouthChinaSea,despiteChina'sobjections

AccordingtoMinistryofIndustry andTrade,inSeptember20 15, t h e nationwidec r u d e oilproductionisestimatedatabout13.9milliontons,increase9%compared

w i t h thesameperiodof2014

Bytheway,gasproductionisestimatedat7.8billionm3,increase1.8%comparedw i t hthesameperiodof2014.Petroleumproductionisestimated5.1milliontons,increase25.7%comparedwiththesameperiodof2014

tohandlesweetandlessex pen si ve s o u r c r u d e o i l f r o m Russia,t h e M i d d l e E a s

t , a n d Venezuela.V i e t n a m p l an s tooffer49%ofDung Quat'sequitytoforeigninvestorsinordertofinancetheup gr ad eandexpansionofDungQuat.Inaddition,theNghiSonrefinery,whichisnowunderconstruction,isexpectedtocomeonlineinmid-

2017andtheVungRorefinery,w h i c h w i l l bed e s i g n e d byJ a p a n ' s J G C C o r p o

InternationalOilCompanies (IOCs)suchasExxonMobil,Chevron,andZarub

partnershipswithPetroVietnam.IOCsmustr e c e i v e approvalfromtheOilandGasDepartmentofthePrimeMinisterandmustnegotiateup st r e a m licenseswithPVEP

Averageo i l p r i c e i n September2 0 1 5 i s a b o u t 4 8 U S D /

b a r r e l , t o t a l e x p l o i t i n g p r o d u c t i o n o f P V N byt h e e n d o f S e p t e m b e r i

s estimatedata b o u t 2 1 8 6 milliontons.Inthisperiod,thegroupexports11.9milliontonsofcrudeoilbuttherevenueo n l y reaches3.05billiondollarscomparedtoSeptember2014exporting6.8milliont o n s , r e a c h i n g 5 9 8 b i l l i o n d o l l a r s T h e c r u d e o i l p r i c e

h a s d e c r e a s e d l e a d i n g t h e exportingvolumeincreasesbuttheexportingrevenuestilldecrease

Vietnamcurrentlyholds24.7trillioncubicfeet(Tcf)ofprovednaturalgasreserves,u p f r o m

6 8 T c f i n 2 0 1 1 , a c c o r d i n g t o O G J I n c r e a s e d f o r e i g n i n v e s t m e n t s i n

c e

2007hasledtogreaterexploration,significantlyincreasingVietnam'sprovedn a t u r a lgasreserves.

Vietnamp r o d u c e d 3 4 6 b i l l i o n c u b i c f e e t o f marketedn a t u r a l g a s i n 2 0 1 3 , a l

l ofw h i c h was domesticallyconsumed, accordingto theBPStatistical Review

iscurrentlyself-sufficientinnaturalgas,butPetroVietnampredictsa growingsupply gapch ar ac

te ri zed bydemandsurpassing supply,particularlyinsouthernVietnam.Vietnam's2011GasMasterPlanincludesinitiativestopromotenaturalgasinthep r i m a r y ene rg y

m i x , g a s p r o d u c t i o n a n d consumptiont a r g e t s , a n d d e t a i l e d i n f r a s t r u c t

u r e p l a n s f o r g a s g a t h e r i n g s y s t e m s , pip elin es, andgasprocessingfacilities.TheVietnamesegovernmenthasconsideredimportingliquefiednaturalgas(LNG)inthesouthernpartofthecountrytomeetgrowingnaturalgasdemandandfillthesupplygap.PetroVietnamGas,asubsidiary ofPetroVietnam,signed am e m o r a n d

u m

ofunderstandingandafront-endengineeringanddevelopmentc o n t r a c t withtheTokyoGasCompanytodeveloptheThiVaiLNGterminalintheV u n g T au p r o v i n ce T h e t e r m i n a l is e x p e c t e d

t o b e o p e r a t i o n a l i n 2 0 1 7 P V G a s alsosignedagassalesandpurchaseagreementwithGazpromofRussiaonMarch6 , 2014.Undertheagreement,PVGaswillreceive48Bcf/

yviatheThiVaiLNGterminal.Asecondterminal,SonMyLNG,isalsoplannedforoperationsstartingin2 0 1 8 , althoughconstructionhasyettobegin

2.2.3 Exchangeregime

InVietnam,exchangeratepolicycanbeseenasapartofmonetarypolicytoaffectto s u p

p l y a n d d e m a n d o f f o r e i g n c u r r e n c y o n e x c h a n g e m a r k e t a n d a r c h i v

e t h e targetsofmonetarypolicyistocontrolinflationandstabilizethepurchasingpowero fmoney,encourageexports,restrictimportsandenhancetheeconomicgrowth

bandsinMarch1 9 8 9 Accordingtothisexchangeregime,theexchangeratesofcommercialbanks

1 9 9 1, c o m m e r c i a l b a n k s w e r e f o l l o w e d t o d e t e r m i n e e x c h a n g e rat es notexceeding0.5%ofofficialexchangerates.

isadjustedfrom±2%to±3%.