The Impacts of Participation in Free Trade Agreements on Stock Return and Volatility in Vietnam Stoc...

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Master Thesis Master program, Department of Banking and Finance

College of Business Chinese Culture University

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The Impacts of Participation in Free Trade Agreements on Stock

Return and Volatility in Vietnam Stock Exchange

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Thesis Advisors:

Professor Fu-Ju Yang, Ph D

Professor Yi-Hsien Wang, Ph D

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Graduate Student: Do Dat Quang

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December, 2014

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The Impacts of Participation in Free Trade Agreements on Stock Return and

Volatility in Vietnam Stock Exchange

Student: Do Dat Quang Advisor: Fu-Ju Yang, Ph.D

Chinese Culture University

ABSTRACT

In term of the sweeping world economy globalization, trade liberalization and international integration become inevitable trends that all countries need to enforce The concrete manifestation of these trends is the formation of Free Trade Areas, Free Trade Agreements and the elimination of tariff barriers of the members Vietnam, a developing country in Southeast Asia whose economy significantly depends on foreign trade, is not out of these tendencies To be specific, with an emerging and dynamic economy, a potential over-90-million-customers-market, Vietnam is really an ideal destination for not only domestic investors but also international ones Additionally, established in the 1990s, Vietnamese stock market is such an attractive channel to meet the massive wave

of investment as well as the international huge capital flows However, being a young and small market, Vietnamese stock market is easily vulnerable with any international event The purpose of this study investigates the impact of participation in FTAs in Vietnam stock exchange Collecting daily indices in Ho Chi Minh stock exchange through VN-Index in the period from 2001 to 2014 as sample data, the study examines stock returns volatility with the assistance of Exponential General Autoregression Conditional Heteroscedasticity (EGARCH) model and RATS statistic software The results are to identify the effect of Vietnamese participation in Free Trade Agreements (FTAs) and World Trade Organization (WTO) on stock market returns and volatilities Hopefully, the findings can contribute the general literature about researching the stock market return and volatility especially in the emerging and developing countries’ stock market

Key words: Trade Liberalization, Free Trade Agreement, International Integration, Stock

Market Return, Volatility, EGARCH model

ACKNOWLEDGMENT

First and foremost I offer my sincerest gratitude to my supervisors, Prof Yang

Fu-ju and Prof Yi-Hsien Wang, who have supported me throughout my thesis with their patience and knowledge I attribute the level of my Master degree to their encouragement and effort and without them this thesis, too, would not have been completed or written One simply could not wish for a better or friendlier supervisors

I would like to show my sincere thanks to authorities of Chinese Culture University for giving me the opportunity of studying and researching in a professional condition

I am grateful to teachers and staffs of Department of Banking and Finance for nice supporting and encouraging me during the preparation of this thesis

Finally, many sincere thanks to my family, friends, colleagues who are always helping and encouraging me throughout this thesis

Do Dat Quang

24 December 2014

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CONTENTS

ABSTRACT iii

ACKNOWLEDGMENT iv

LIST OF FIGURE vii

LIST OF TABLES viii

CHAPTER 1 1

INTRODUCTION 1

1.1 Research Background 1

1.1.1 An overview of Vietnamese stock market 1

1.1.2 Vietnam and participation in Free Trade Agreements (FTAs) and World Trade Organization (WTO) 4

1.2 Research Motivation 6

1.3 Research Objectives and Scope 6

1.4 Research Structure 7

CHAPTER 2 8

LITERATURE REVIEW 8

2.1 Stock Return Volatility 8

2.2 Event Study 9

2.3 Empirical Impacts on Stock Return Volatility 10

2.3.1 Political events 11

2.3.2 Economic events 13

2.3.3 Trade liberalization, WTO and FTAs 16

CHAPTER 3 19

DATA AND METHODOLOGY 19

3.1 Sample Data 19

3.2 Modeling Time-varying Volatility 20

CHAPTER 4 24

EMPIRICAL RESULTS 24

4.1 Data Description 24

4.2 Test of Stationary 26

4.3 Test of ARCH Effect and Volatility Asymmetry 28

4.4 Empirical Results 29

CHAPTER 5 33

CONCLUSION 33

REFERENCES 35

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LIST OF FIGURE Figure 1-1 Research structure 7 Figure 4-1 The trend graph of VN-Index 24 Figure 4-2 The trend graph of VN-Index return 25

LIST OF TABLES

Table 1-1 The basic criteria of Vietnamese stock market during 13-year performance 3

Table 3-1 Event identification 22

Table 4-1 Basic statistics for HOSE stock market returns 26

Table 4-2 The AIC and SBC value of unit root test of VN-index returns 27

Table 4-3 The ADF and P-P value of unit root test of VN-index returns 28

Table 4-4 The ARCH effect and volatility asymmetry test 29

Table 4-5 The Empirical Results of AR(2)-EGARCH Model 31