The relationship between macro economic factors and the price index of bank stocks price in vietnam stock market

In this thesis, the author chooses to show deep insight into the relationship between four macroeconomic criteria including Exchange rate, Money supply M2, Inflation rate and short-term

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MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIET NAM

BANKING UNIVERSITY OF HO CHI MINH CITY

PHUNG THIEN AN

THE RELATIONSHIP BETWEEN MACRO ECONOMIC

FACTORS AND THE BANK STOCK PRICE IN

VIETNAM STOCK MARKET FROM 2012 TO THE FIRST QUARTER OF 2018

GRADUATION THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

HO CHI MINH CITY, MAY 2018

MINISTRY OF EDUCATION AND TRAINING THE STATE BANK OF VIET NAM

BANKING UNIVERSITY OF HO CHI MINH CITY

PHUNG THIEN AN

THE RELATIONSHIP BETWEEN MACRO ECONOMIC

FACTORS AND THE BANK STOCK PRICE IN

VIETNAM STOCK MARKET FROM 2012 TO THE FIRST QUARTER OF 2018

GRADUATION THESIS MAJOR: FINANCE – BANKING

CODE: 7340201

INSTRUCTOR M.S LIEU CAP PHU

BANKING UNIVERSITY OF HO CHI MINH CITY VIETNAM

High-Quality Program of Banking and Finance

ABSTRACT

price in Vietnam stock market from 2012 to the first quarter of 2018

In the current overall development of the economy, the role of analyzing the effects of macroeconomic factors is indispensable in order to figure out viable remedies to retain the sustainable growth of the country’s economic system One of the most concerns of the public is the stability and development of the stock market In this thesis, the author chooses to show deep insight into the relationship between four macroeconomic criteria including Exchange rate, Money supply M2, Inflation rate and short-term lending interest rate and the bank stock price in the Vietnam stock market Assumptions are Inflation rate, Exchange rate and Short-term interest rate have a reverse correlation to the bank stock price whereas Money supply M2 observes an opposite pattern

Results indicate that all assumptions are favorable and the author also analyses all factors

in more details through graphs, showing the fluctuations in each criteria in bank stock price Last but not least, this study could partly contribute to the research of relevant issues in stock market and provide a little necessary information for the future experiments

Key words: Inflation rate, Money supply M2, Exchange rate, Short-term lending rate, Bank stock price

ĐẠI HỌC NGÂN HÀNG THÀNH PHỐ HỒ CHÍ MINH

Chương trình Cử nhân Chất lượng cao – Chuyên ngành Tài chính Ngân hàng

TÓM TẮT

ngân hàng trên thị trường chứng khoán Việt Nam giai đoạn 2012-quý 1/2018

Trong sự phát triển chung của nền kinh tế, vai trò của việc phân tích tác động của các yếu tố kinh tế vĩ mô là không thể thiếu để tìm ra các biện pháp khả thi nhằm duy trì sự phát triển bền vững của hệ thống kinh tế của đất nước Một trong những mối quan tâm nhất chính là sự ổn định và phát triển của thị trường chứng khoán Trong luận án này, tác giả chọn phân tích về mối quan hệ giữa bốn tiêu chí kinh tế vĩ mô bao gồm tỷ giá, cung tiền M2, tỷ lệ lạm phát và lãi suất cho vay ngắn hạn đến giá cổ phiếu ngân hàng trên thị trường chứng khoán Việt Nam Tác gải đặt ra giả định là tỷ lệ lạm phát, tỷ giá hối đoái và lãi suất ngắn hạn có sự tương quan nghịch với giá cổ phiếu ngân hàng trong khi cung tiền M2 có tác động cùng chiều đến giá cổ phiếu ngành ngân hàng

Kết quả cho thấy rằng tất cả các giả định đều thuận lợi và tác giả cũng phân tích tất cả các yếu tố chi tiết hơn thông qua biểu đồ, cho thấy sự biến động trong từng tiêu chí trong giá cổ phiếu ngân hàng Cuối cùng nhưng không kém phần quan trọng, nghiên cứu này một phần có thể góp phần vào việc nghiên cứu các vấn đề liên quan trên thị trường chứng khoán và cung cấp những thông tin cần thiết cho các nghiên cứu trong tương lai

Từ khóa: Tỷ lệ lạm phát, Cung tiền M2, Tỷ giá hối đoái, lãi suất tiền gửi ngắn hạn, giá

cổ phiếu ngành ngân hàng

DECLARATION

I, Phung Thien An, declare that this minor thesis on “The relationship between economic factors and bank stock price in Vietnam stock market from 2012 to the first quarter of 2018” is a presentation of my original research work Whether contributions

macro-of others are involved, every effort is made to illustrate this clearly, with the reference

to the literature, and acknowledgement of collaborative research and discussions

The thesis is for the partial fulfilment of the requirement for the degree of Bachelor of Banking and Finance, and it is an original work

It has not been summited earlier, either partly or wholly to any other University or Institution has not been published in any other journal or magazine

The work was done over the guidance of Lieu Cap Phu, MA at Banking University of

Ho Chi Minh, Vietnam

[Author’s name and signature]

ACKNOWLEDMENTS

I would first like to appreciate my thesis advisor Ms Lieu Cap Phu of the Banking Faculty at Banking Ho Chi Minh City The door to Ms Phu’s office was always open whenever I ran into a trouble spot or had a question about my research or writing She persistently and consistently allowed this paper to be my work but steered me in the right direction whenever she thought that it was of essence for me

She has been the ideal thesis advisor Her previous advice, insightful criticisms, and gentle encouragement aided the writing of this thesis in countless ways

I take this opportunity to express gratitude to all of the High-Quality Program Department members for their great assistance I would also like to thank my friends for accepting nothing less than excellence from me

Last but not least, I must express my profound gratitude to my family, especially my parents for providing me with unfailing support and perpetual encouragement throughout my years of study and through the process of researching and writing this thesis This accomplishment would not have been possible without them

I also place on record, my sense of gratitude to one and all, who directly or indirectly, have given their hand in this venture

Wholeheartedly appreciate for all your stimulation and encouragement

TABLE OF CONTENT

ABSTRACT i

TÓM TẮT ii

DECLARATION iii

ACKNOWLEDMENTS iv

LIST OF CHARTS vii

LIST OF FIGURES viii

LIST OF APPENDICES viii

ABBREVIATIONS x

CHAPTER 1: THE OVERVIEW OF THE THESIS 1

1.1 Research background 1

1.2 Purpose of research 2

1.3 Significance of research 3

1.4 Object and scope of the study 3

1.5 Research questions 4

1.6 Research methods 4

1.7 Structure of the themes 5

CONCLUSION OF CHAPTER 1 7

CHAPTER 2: AN OVERVIEW OF SYSTEMATIC RISK AND MACROECONOMIC FACTORS AFFECTING STOCK PRICES IN THE BANKING SECTOR 8

2.1 Systemic risk and factors that create systemic risk in stock investment 8

2.1.1 Risks 8

2.1.2 Systematic risk in stock investment 9

2.2 Review of literature 10

2.3 Macro-economic factors affect the price of bank stock 15

2.3.1 Inflation rate 15

2.3.2 Money supply M2 15

2.3.3 Exchange rate (USD/VND) 16

2.3.4 Short-term interest rate 16

CONCLUSION OF CHAPTER 2 17

CHAPTER 3: RESEARCH METHODS AND DATA BASIS 18

3.1 Description of variables 18

3.1.1 Dependent variable 18

3.1.2 Independent variable 18

3.2 Methods for data processing and proposed research methods 21

3.2.1 Methods for data processing 21

3.2.2 Research methods 22

CONCLUSION CHAPTER 3 25

CHAPTER 4: RESEARCH RESULTS 26

4.1 Descriptive Statistics 26

4.2 Measured results by ADRL model 30

4.2.1 Unit-root Test 31

4.2.2 Latency selection for ARDL model 33

4.2.3 Bound Test 34

4.2.4 Model estimation in the long run 35

4.2.5 Short-term model estimation 37

4.2.6 Defects verification of the model 38

4.2.7 Stability test of the model 39

4.2.8 Granger causality test 41

4.3 Overview of the results 42

4.3.1 Money Supply M2 42

4.3.2 Exchange rate 43

4.3.3 Inflation rate 43

4.3.4 Short-term interest rate 43

CONCLUSION OF CHAPTER 4 44

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 45

5.1 Summary of the research 45

5.2 Contributions of the research 46

5.2.1 Research contributions and its significance 46

5.2.2 Recommendations for investors, bank executives and policy makers 46

5.3 Limitations of research and suggestions for future research 48

CONCLUSION OF CHAPTER 5 51

GENERAL CONCLUSION 52

REFERENCES 53

LIST OF CHARTS

Chart 4.1: Descriptive statistics of variables 25

Chart 4.2: Fluctuations in LM2 and LG 26

Chart 4.3: Fluctuations in Exchange rate and Bank Stock Price 27

Chart 4.4: Fluctuations in Inflation rate and Bank Stock Price 27

Chart 4.5: Fluctuations in Short-term interest rate and Bank Stock Price 29

Chart 4.6: Unit-root Test on variable 31

Chart 4.7: The critical value of Unit-root test 31

Chart 4.8: ARDL Model (1,0,0,1,1) 33

Chart 4.9: Long-term Relationship Test 34

Chart 4.10: Long-term Coefficient 35

Chart 4.11: Short-term Coefficient 36

Chart 4.12: The variables are statistically significant in the short run 36

Chart 4.13: Causality tests 38

Chart 4.14: Results of Granger Causality Test 40

LIST OF FIGURES

Figure 4.2: Top 20 models according to AIC 33 Figure 4.3: CUSUM Test about stability in the model……… 39 Figure 4.4: CUSUM square Test in stability in the model 39

LIST OF APPENDICES

Appendix 1 ADF Test I

ADF Test for LG at I(0) I ADF Test for LG at I(1) II ADF Test for LM2 at I(0) III ADF Test for LM2 at I(1) IV ADF Test for LER at I(0) V ADF Test for LER at I(1) VI ADF Test for LLP at I(0) VII ADF Test for LIR at I(0) VIII Appendix 2 PP Test IX

PP Test for LG at I(0) IX

PP Test for LG at I(1) X

PP Test for LM2 at I(0) XI

PP Test for LM2 at I(1) XII

PP Test for LER at I(0) XIII

PP Test for LER at I(1) XIV

PP Test for LLP at I(0) XV

PP Test for LIR at I(0) XVII Appendix 3 Latency Selection in Ardl Model XVIII Appendix 4 Bound Test XVIX Appendix 5 Short-term and Long term relationship between criteria XX Appendix 6 LM Test XXI Appendix 7 Ramsey Test XXII Appendix 8 Breusch-Pagan-Godfrey Test XXIV Appendix 9 Granger Causality Test XXV

ABBREVIATIONS

CHAPTER 1: THE OVERVIEW OF THE THESIS

1.1 Research background

The stock market is an effective way to raise capital Since its inception and development, it has played an indispensable role in the operation and development of the economy In some rapidly growing stock markets such as New York, London, Japan… besides helping capital to flow quickly, the stock market is also a good investment place for many organizations and individuals to participate and seek profit in the market as well In Vietnam, although the market has been operating since 2000, it is relatively new compared to other stock markets in the world However, over the past 15 years, Vietnam stock market has been increasingly improving and expanding

In the process of development of the economy, the circulation of capital on the stock market contributes to making the production machinery operate smoothly when participating in securities investment in the market more attractive All investment decisions are considered in terms of risk and expected return Stock prices are heavily affected by a variety of risk factors, including systemic risk and non-systemic risk Stock valuation is an urgent and necessary task in the current period, when the stock market in particular and the Vietnamese economy is still backward compared to the general development of the stock market all over the world

To determine the correlation between the stock market and the risks, there are many different measures In some countries where financial markets have developed, investors have been able to apply modern financial investment theories to select stocks within their portfolio based on two broad spectrum models namely CAPM and APT The rate of return on securities will be determined by the risk that the stockholder is subjected

to, and can be determined by the multiple regression method Depending on the views and perceptions, each investor or researcher will put different variables into the research model The later methodology contributes to improve and overcome the disadvantages that previous methods encountered

Banking is a key industry and plays a crucial role in the economy It is also one

of the riskiest sectors, especially systematic risk and non-systematic one On the global scale, the most recent global economic crisis of 2007-2008 has raised the concern as well

as has posed a strong influence of the banking industry to the market In the Vietnamese market, after witnessing a period of instability, the economy is gradually recovering Since, the banking sector has experienced positive changes, the ratio of foreign exchange reserves has been constantly improving and by the end of 2017, it has reached nearly 52 billion USD In addition, resolution 42 on dealing with bad debt, which came into force

on 15 August 2012, is an important legal document because for the first time, legal issues related to the handling of bad debts and assurance of debts has lasted for many years and have grounds for settlement Particularly, over the past three years, from 2015 to 2018, banks have been massively racking up the stock market and the banking sector has been increasing significantly and affecting the VN Index Is there any risk behind the rapid development? And do macroeconomic policies have a significant impact on the banking sector? Therefore, studying the macro factors affecting the risk of the banking sector is

essential Based on that, the writer chose the topic “The relationship between

macro-economic factors and bank stock price in Vietnam stock market from 2012 to the first quarter of 2018”

1.2 Purpose of research

Systematizing issues related to systemic risk in stock investment and providing

an overview of price fluctuations in banking stocks

Identifying systemic risks from the macro-economy that affects the stock price index on the Vietnam stock market in general and banking sector in particular

Case study of the ARDL model will identify the macroeconomic factors affecting the banking sector in the Vietnamese stock market, the long-run equilibrium relationship between the banking sector price index and the systematic risk of the market

Summarizing the effect of systematic risk factors on the stock price index of banking sector and supposing some recommendations for investors, managers and the government in managing this field

1.3 Significance of research

Modern econometric models are increasingly popular used by many investors in this field such as OLS, VAR, VECM, etc When the time series data does not stop at I (0), OLS regression will be easy to fall into the fake regression, resulting in inaccurate model test results VAR and VECM are only applicable when time series integrate at the same level without enabling integrated data at different levels Meanwhile, ARDL allows regression with integrated time series data at both I (0) and I (1) In Vietnam, there have been many empirical studies to explain the relationship between price and macro factors affecting stock prices, the VN-Index, but currently, very few empirical studies are specific to the banking sector The study also showed the long-run equilibrium adjustment factor (ECM) of the ARDL equation for the banking sector index, thus taking into account short-term patterns This research is not only meaningful for investors, securities analysts, but also for banks to identify the factors that can influence their performance Besides, it also helps the government to implement favorable policies The study also opens up a number of suggestions for future studies

1.4 Object and scope of the study

Research object: Systematic risk factors impact the stock price of the banking sector in Vietnam stock market from 2012 to the first quarter of 2018

Research scope: The topic is limited to studying the use of the ARDL model to determine the relationship between macroeconomic factors and the price index of banking stocks in the Vietnam stock market, from January 2012 to March 2018 The market data includes interest rates, inflation rates, exchange rates and money supply according to the monthly data released by the General Statistics Office of Vietnam and the cophieu68.com, cafef.com, banks the State Bank of Vietnam (SBV), the Foreign

Investment Department, and the International Monetary Fund (IMF)

1.5 Research questions

The study aims to answer two questions, thus drawing conclusions about the short- and long-term relationship between the banking sector stock price index and variables:

- Are the systematic risk factors in the market really affecting the price of stocks in the banking sector on the stock market in Vietnam?

- Are there long-term relationships between macroeconomic factors and the banking sector price index?

There are many studies in the world that show that stock prices are strongly impacted by macroeconomic factors in the market Therefore, is the banking industry in Vietnam affected by these factors or not, and if so, what is the impact on banking sector stocks?

1.6 Research methods

The research was analyzed by the method of collecting historical data published

in mass media, data sources provided by the Government in combination with methods

of comparison, analysis, Statistics, using illustrative charts to give comments on the practicality of theory when applied in the Vietnam market

+ Description statistics:

Statistics of the macro risk factors required for the topic from the information pages published by the statistical office, cafef.com, cophieu68, vietstock

+ Model building:

The study uses the ARDL regression model to determine the regression coefficients of the factors affecting the stock price index of the banking sector, thereby identifying the extent of impact of macro factors on bank stocks as well

as finding the equilibrium equation in the long run between the variables introduced into the model

Evaluate the suitability of the model and the limitations of the research model: including basic modeling, such as self-correlation testing, variable error variance At the same time, the use of the ARDL regression model also requires the stability of the regression model These will be the basis for determining the results that the model gives

1.7 Structure of the themes

Chapter 1: Overview

Chapter 1 will summarize the urgency of the topic, the research objectives, and supply the research questions This chapter also summarizes the scope and subject matter

of the research as well as the scientific, practical and research contributions

Chapter 2: An overview of systematic risk and macroeconomic factors affecting stock prices in the banking sector

In Chapter 2, the writer introduces the systematic risk of the stock and the relationship between risk and stock price This chapter will also present an overview of the banking market, characteristics, types, and macroeconomic risks that affect the banking industry In addition, it also reviews the results of research in the world and in Vietnam related to determining the relationship between macro factors and the stock market

Chapter 3: Research methods and databases

In this chapter, the writer will analyze in detail the research database, the variables included in the model, the reasons for using the variables, and the expectations about the variability of the independent variables on dependent variable ones It will also outline methods of data collection, processing, and statistical hypothesis testing and regression models

Chapter 4: Research results

This chapter will summarize the results of the model study presented in Chapter

3 Specifically, it will analyze the macroeconomic factors affecting the price index of listed banks through regression model with ARDL

Chapter 5: Conclusion and recommendations

Chapter 5 will draw conclusions about the relationship between the sector price index and the systematic risk of banking sector stocks, assessing the impact of factors

on the stock price index Simultaneously, the results of the study will suggest to investors the establishment of effective portfolio and recommendations for the bank administrator

as well as the state bank to develop effective strategies The last part of Chapter 5 also outlines the limitations of the paper and suggests future research

CONCLUSION OF CHAPTER 1

Banking plays a very important role in the market economy, directly related to a great asset in both size and value The reality is that the volatility of the economy is greatly influenced by changes in the banking system Therefore, research into the risks to the industry is urgent, an indispensable need to be concerned, in order to adjust policies accordingly Chapter 1 highlights the urgency as well as the basics and novelty of the research topic, summarizing what will be presented in the next chapters Thus, the reader can cover the essence of the article in this chapter

CHAPTER 2: AN OVERVIEW OF SYSTEMATIC RISK AND MACROECONOMIC FACTORS AFFECTING STOCK PRICES IN THE BANKING SECTOR

2.1 Systemic risk and factors that create systemic risk in stock investment

2.1.1 Risks

2.1.1.1 Definition of risks

On a global scale, there are many numerous approaches and notions on risk Risk – according to Frank Knight (2012) is the mishaps related to unexpected upheavals, or risk is the uncertainty associated with unintended events Meanwhile, Athur William, Jr Michael, L Smith (1998) indicate that: "Risk is implicit in the result Risk mostly originates human activities When there is a risk, outcomes and repercussions are unpredictable The presence of risk causes uncertainty Risk occurs whenever an action leads to the possibility of being lost, unforeseeable."

Hence, in brief, in the author's perspective the risk is uncertainty and inevitability

in the future Last but not least, it could be predictable or unpredictable, positive or negative

2.1.1.2 Risk classification

Risks are organized based on different criteria, origin of risk, operational environment, industry, risk characteristics When it comes to the analysis on stock market, the kind of risk that should be concerned is market risk This risk could be divided into 2 types:

+ Interest rate: the risk of adverse effects on the financial result and capital of the bank caused by changes in interest rates

+ Foreign exchange risk: the risk of adverse effects on the financial result and capital

of the bank caused by changes in foreign exchange rates

+ A particular type of market risk is the risk of change in the market price of securities, financial derivatives or commodities traded or tradable in the market

Additionally, based on the profit or loss, risks could be categorized into two types, namely speculative risk and static risk

+ Static risk: the risk associated with situations that may or may not occur

+ Speculative risk: a situation where there is both a possibility of loss and gain

Based on the nature of whether or not they can be diversified, risks are classified into two categories: systematic risk and non-systematic risk

+ Systematic risk: the risk inherent to the entire market or market segment, and it can affect a large number of assets

+ Non-systematic risk: this type of risk refers to the uncertainty inherent in a company

or industry investment

In stock investment, any stock that is likely to suffer huge losses is considered to

be potentially risky In the paper, the writer will go in the direction of the second classification, and more in-depth analysis of systemic risk from the macroeconomic factors that affect the price, thereby afflicting the rate of return of the stock

2.1.2 Systematic risk in stock investment

In addition to the expected return on investment, investors have also interest in issues related to financial risk As aforementioned, financial risk includes two types namely systematic risk and non-systematic risk For non-systematic risk, investors can easily eliminate risky cases if they know how to diversify the portfolio in a proper manner Nonetheless, in terms of systematic risk, no matter how the investors diversify, this kind of risk could not be eliminated, with the exception for the case of diversifying portfolios in different countries There are various factors that cause systematic risks, ranging from macro factors, politics, law, natural disasters, and the environment as well But in stock investment, there are major systemic risks, comprising:

- Interest rate risk: the risk that an investment's value will change due to a change

in the absolute level of interest rates, the spread between two rates, in the shape

of the yield curve or in any other interest rate relationship This type of risk affects

the value of bonds more directly than stocks and is a significant risk to all bondholders As interest rates rise, bond prices fall – and vice versa

- Foreign-exchange risk: the financial risk of an investment's value changing due

to the changes in currency exchange rates This also refers to the risk an investor faces when he needs to close out a long or short position in a foreign currency at

a loss, due to an adverse movement in exchange rates

- Inflation risk: this risk arises from the decline in value of securities cash flow due

to inflation, which is measured in terms of purchasing power

- Price risk is the risk of a decline in the value of a security or a portfolio that can

be minimized through diversification, unlike market risk It is lower in stocks with less volatility such as blue-chip stocks Investors can use a number of tools and techniques to hedge price risk, ranging from relatively conservative decisions such as buying put options to more aggressive strategies including short selling and inverse ETFs

Furthermore, there are many contributing factors leading to systematic risk in stock investment such as the impacts of gold price, world oil price, psychological effects, human behaviors but the risks mentioned above are the risk that investors often encounter These risks affect the price, thereby influencing the rate of return of investors

2.2 Review of literature

Paul & Mallik (2001) studied long-term relationships between macroeconomic factors and stock prices in the Australian banking and financial sector They used the ARDL model to investigate causal relationships between the banking sector, the Australian stock market index and financial indicators with macroeconomic variables including consumer price index (CPI), interest rates and GDP adjusted seasonally The results show that interest rates have the opposite effect when GDP growth has the same impact on banking stocks Inflation had no significant effect in this study

Vaz, Ariff & Brooks (2008) studied the effects of publicly disclosed official interest rates on the yields of shares of major Australian banks from 1990 to 2005 The

author has recorded the specific days in which interest rates rise or fall and calculate the yields of bank shares in those days The major drawback of the study is that the author uses only descriptive statistics to graph the change in interest rates of bank shares in two cases: interest rates and interest rates decrease According to this study, in contrast to initial expectations, bank yields will not be negatively affected by interest rates published

as evidence in the US

Kasman, Vardar & Tunc (2011) investigated the impact of interest rates, yields, and market yields on yields of Turkish banks using OLS and Garch models Research shows that interest rates and exchange rates have the opposite effect on the yields of banking stocks The study also identifies bank yields as sensitive to market yields rather than interest rates and exchange rates The downside of the study is that the researchers merely estimate the OLS and Garch models without examining the robustness and effectiveness of the model

Muneer, Butt & Rehman (2011) used a multi-factor model to analyze the effects

of macro variables: market index (KSE 100 Index), consumer price index, exchange rates, industrial output index, M2 money supply and the spread between bank lending and bank deposit rates on the Karachi stock market Research data is the monthly data, from June 1998 to June 2008 with 15 banks The Garch model is used on the yields of each bank and the entire banking industry and the results show that market yields are statistically the same in all models where the dependent variable is the yield of each bank, while the inflation rate is the reverse effect in some models The dependent variable is the interest rate of each bank Moreover, the aggregate return of stocks across the banking industry reacts more sharply to macroeconomic shocks than to the yields of individual banks The study also showed that risk-free interest rates, banking spreads have the same effect; The rate of inflation has the opposite impact and the exchange rate has no impact on the yields of Pakistani banks

Asaolu & Ogunmuyiwa (2011) this study was undertaken to evaluate the effect

of macroeconomic variables on stock market prices using annual time series datasets for

Nigeria for the period 1980-2013 The data were analyzed with the application of OLS regression technique The study employs Johansen co-integration and VECM based on arbitrage pricing theory (APT) The macroeconomic variables utilized were gross domestic product (GDP) and broad money supply (M2) The results of the findings indicate that Nigerian stock market prices have long-run relationship with macroeconomic variables However, GDP has significant long-run negative effect on stock prices contrary to a priori expectation that GDP has significant positive effect on stock prices But M2 has significant long-run positive effect on stock prices, the result being consistent with a priori expectation Again, there is unidirectional causal effect between GDP and stock prices with direction running from stock prices to GDP Whereas there is no causal effect between stock prices and broad money supply However, in the short-run both GDP and M2 have positive but insignificant effect on stock prices in Nigeria This result suggests that stock market in Nigeria is informational inefficient It shows that predicting stock prices based on macroeconomic factors is difficult

Kumar & Puja (2012) analyzed the impact of five factors: industrial output, consumer price index, money supply, exchange rate and short-term interest rates on Indian stock market prices The results reveal that in the long run, the stock price index

is influenced in the same direction by money supply and real economic activity characterized by the industrial output index, which is negatively impacted by the consumer price index Specific interest rate is affected by the interest rate of 3-month government bonds and the exchange rate does not affect the Indian stock index

Jawaid & Haq (2012) represented the impact of interest rates, exchange rates on banking shares in Pakistan The crucial point of the study is that the author analyzes the two-dimensional relationship of these variables The outcomes of the integrated copper test showed a long-term negative relationship between exchange rates and interest rates with stock prices Analysis of the Granger results shows the two-way causal effect between exchange rates and stock prices, while interest rates have only one-way causality in the short run with stock prices From there, the author suggests that investors

should make investment decisions when there are macro fluctuations in interest rates and exchange rates

In the study of short-term and long-term relationships between macroeconomic factors and the Karachi stock market, four authors, Abid Ali Shah, Rehana Kouser, Muhammad Aamic and Irum Saba (2012) analyzed Experiment with the ARDL model

to test the correlation between Karachi stock market price index with three macroeconomic variables of inflation, interest rate and exchange rate The authors then conducted regression combining OLS and ECM models to analyze the short- and long-term relationship between these variables and the Karachi stock market index The results show that there is a long-term coordinated relationship between stock prices and interest rates and exchange rates by the Wald test The results also show that investors can predict future market trends influenced by macro variables For the government, policy and interest rates will need to be adjusted to fit the market With the ECM regression technique, this paper also provides short-term effects and other models that demonstrate long-term relationships with a 1 ECM delay factor

Monjazeb & Shakerian (2014) displayed the long-term effects of macroeconomic variables: exchange rates, interest rates and inflation on the yields of seven Iranian banks

on world gold prices and oil price, crude, gold price, exchange rate, interest rate, inflation rate, Gross Domestic Product Research data is panel data with a rigorous research methodology After checking the stopping behavior of the test variables, the authors found that the variables gold, exchange, interest, would be included in the model as variance; The inflation was introduced into the original model while the GDP was introduced into the second-order differential model The author then used the F-Limer test to show that the use of table data was appropriate The author continues to compare models by LM-test, self-correlated by Durbin-Watson test, the remainder is distributed

by Durbin-Watson test, the remainder is distributed by the standard Jarque-Bera, the author noted the GLS model The final result after the analysis showed that world oil price had the same impact and that gold prices had an adverse effect on the yields of Iranian banks

Subburayan & Srinivasan (2014) demonstrated the long-term effects of macroeconomic variables, exchange rates, interest rates and inflation on the yields of 90 banks in India Data is collected by month, from 1 January 2004 to 31 December 2013 The main idea in the research method is to use the Var model through the steps such as stop counting, optimal latency determination, Granger results analysis and Var model estimation, Johansen co-validation The results show that: the selected macro variables have an impact on the bank price index; There is a long-term relationship between bank stock returns and macro variables; Average bank price index and interest rate have no causal relationship with the exchange rate The study also suggests that exchange rates are important information for forecasting bank sector yields

To study the level of impact as well as the long-term relationship between the macroeconomic factors in Vietnam's stock market, Le Hoang Phong and Dang Thi Bach Van (2017) used the ARDL model to estimate the coefficient Long-term equilibrium as well as modeling of this relationship between variables introduced into the model In the study, the author introduced two independent variables: CPI, deposit rate, lending rate, M2 money supply, exchange rate, government bonds The data of the research was gained on a monthly basis from January in 2001 to December in 2013 (156 observations) The results of the regression analysis show that macro factors have a large effect on the stock market in the long run, except for deposit rate and lending rate

Previous studies have shown that the number of studies of macroeconomic impacts on banking stocks is not much in comparison to the impact of macroeconomic factors on the stock market in Vietnam The macro variables used by the authors are economic growth rate, inflation rate or consumer price index CPI, gold price, oil price, money supply, exchange rate, deposit rate and lending interest rate (banking spread) Research methods focus on two directions: time series data and table data with specific models of these data types For countries where the common stock market price index and author want to study the common characteristics of bank shares, then the author will use the time series data, otherwise they will use the table data For the latter, the most commonly used models are DGMM, Garch, GLS For time sequence data, the characters

are often chosen as Garch, Var, VECM However, in this thesis, ARDL Model is chosen

to analyze the series data because it is possible that different variables have different optimal lags, which is impossible with the standard cointegration test Most importantly, the model could be used with limited sample data (30 observations to 80 observations)

in which the set of critical values developed originally by Narayan (2004)

2.3 Macro-economic factors affect the price of bank stock

As inspected, there are a number of factors that exert an influence on the variations of the bank stock price However, in this paper, the author will choose four typical criteria namely: Money supply M2, Exchange rate, Inflation rate and Short-term interest rate

2.3.1 Inflation rate

Inflation has a reverse direction to the banking sector (Muneer et al (2011)) It is convinced that when inflation is high, it illustrates the in-thing but not sustainable growth

of the economy, leading to the tendency that investors will not tend to invest in securities

or deposit their savings at banks because of the depreciation of the currency, instead, they tend to hold real assets such as gold and real estate or strong foreign exchange Thus, as inflation increases, liquidity in the stock market in general and the banking sector in particular will witness a significant drop in liquidity High inflation will make the money flow into the stock market will be weakening gradually, causing the market down, leading to a reduction on the share

2.3.2 Money supply M2

The increase in money supply over the past few years is to maintain a high growth rate for a long time However, when the imbalance between the growth rate of money supply and GDP growth rate is high, inflationary pressures appear As is shown, this will

be an element to the downward pattern on the share

2.3.3 Exchange rate (USD/VND)

According to author’s perspective, there are two cases of exchange rate in the overall economy

- Dollar appreciation means that the VND devalued At that time, 1 USD will be exchanged for more VND and thus, will get a profit from the increase in the exchange rate and investors have a profit when investing First, the investor will use that profit to invest in the stock market or deposit into the bank Secondly, gold, real estate will be invested Thus, when the dollar price increases, this brings more business opportunities for investors than investing in the stock market

- Besides, the dollar depreciation means that the conversion from USD to VND is not an option In order to trade securities, the investors must transfer from USD

to VND and will be subject to a loss due to USD devaluation If the stock market does not give investors the opportunity to make a profit, this conversion makes the investment of securities will increase the risk for their money, so the profit sometimes can be zero or lower than that level

2.3.4 Short-term interest rate

One method of evaluating a company is the discounted DCF method This depicts that future cash flows are discounted to the present and the total amount divided by the number of outstanding shares This price varies by the expectations of the different investors in the company at different times Due to these different expectations, they will make different decisions to buy, sell or hold that stock, according to each person If a company is in a state of poor growth or unattractive returns, due to high debt costs or low revenue, then future cash flows will decline

CONCLUSION OF CHAPTER 2

Chapter 2 gives an overview of the systematic risk issues of stocks, the measurement of systematic risk and the component that creates systematic risk in equity investments This chapter also presents the theoretical basis for the econometric model of ARDL in determining the relationship between macroeconomic factors and the market price index Research conducted in the world's stock markets also shows that for different economies, politics and society, the impact of factors is different The effectiveness of the market is also reflected in the research model The empirical evidence in the world as well as in the domestic market has been generalized by the author, taking into account the statistical significance of the pre-study, as the basis for the argument and choice of the market Vietnam securities in chapter 3

CHAPTER 3: RESEARCH METHODS AND DATA BASIS

LGt = ∑ PitQit

P0Qit

𝑛 𝑖=1

3.1.2 Independent variable

3.1.2.1 Money Supply M2

Money supply M2 is the sum of money in an economy it is calculated as the following formula:

Money supply M1 = Currency + Demand Deposits + Other Deposits

Money supply M2 = Money supply M1 + Savings Deposits

When the state adopts tight monetary policy to curb inflation, the decline in money supply also can be attributable to a decline in business activity In addition, the fall in money supply is also a precursor to marginal decreases in both liquidity and the price of shares By contrast, when the state loosens monetary policy, the increase of money and the growth of investment activity are a corollary As a result, the liquidity of securities will increase, leading to the stock price increasing The author expects Money

supply M2 will impact the same direction to bank share price as the study of Asaolu & Ogunmuyiwa (2011) The author will set the similar research hypothesis.

Ho: Money supply M2 has the opposite trend on the bank stock price

3.1.2.2 Exchange rate

The US dollar today is considered the strongest currency in the world and the change in USD / VND exchange rate has a big impact on the economy If the exchange rate increases (the USD increases against the VND), a dip will be experienced in the income from foreign exchange activities It is evident that this will have a strong impact

on the bank's business performance in the foreign exchange market, and also have effects

on banking stocks On the other hand, the rising exchange rate may can be the contributing factor to inflation, and exert negative impacts on the economy; in details, the stock market in general and banking stocks in particular So, the exchange rate may pose an impact which is indirectly opposite to the bank share investors Thus, the exchange rate may affect the price of banking stocks In this thesis, the author will choose the exchange rate imposed by the government on a daily basis, beginning in 2016, while the figures for previous years will be collected as the fixed rate that the government applied in a particular period As a consequence, the author expects that this criterion has the opposite effect on the bank stocks price

Ho: Exchange rate USD/VND has the same trend on the bank stock price

3.1.2.3 Inflation rate

Inflation is one of the most concerns in the economy Inflation may have a direct impact on the psychology of investors, which will affect the yields of banking stocks as well as banking stocks

The formula of Inflation rate:

Inflation Rate =

Current Period CPI − Prior Period CPI

Prior Period CPI CPI: Consumer Price Index When inflation is high, an instability will be observed in the economy It is evident that when the currency depreciates, investors are more likely to shift to retain safe and highly liquid assets such as gold and precious metals, leading to a decline in the liquidity

of the stock In addition, this also led to a slump in the share price of the banking sector Many studies in the world also reflect this trend, among which research by Kumar & Puja (2012) is the typical example Therefore, the author expects that this pattern is true

of the bank stock price in Vietnam stock market

Ho: Inflation rate has the same trend to the bank stock price

3.1.2.4 Short-term interest rate

The interest rate is the macro variable that has a strong influence on investors' sentiment in particular and the stock market in general The increase in deposit and lending rates has a direct impact on the cost of capital, thus remarkably influencing on the bank's operating results Lending rates will create good sentiment for investors, thereby stimulating demand for bank shares, contributing a rise in yields for banking stocks Thus, rising lending rates will have similar impacts on bank stocks However, according to other analysis, deposit interest rates generally increase with lending rates that will attract cash to flow into savings instead of into investment, resulting in a downward trend in cash inflows into securities, negatively affecting stock prices in general and banking stocks in particular Hence, short-term interest rate will affect the price of bank stocks in various directions

The types of interest commonly used in research are primarily government interest rates, interest rates, and deposit rates In fact, these types of interest rates are

closely related, and moreover, short-term lending interest rate is available and fully disclosed by the IMF

price of bank stocks Thus, this criterion can have both positive and negative trends to the bank stock price and will be analyzed in this thesis

Ho: Short-term interest rate has the same trend to the bank stock price

H1: Short-term interest rate has the opposite trend to the bank stock price

3.2 Methods for data processing and proposed research methods

3.2.1 Methods for data processing

The study has identified four factors commonly found in domestic and international research results to be applied to the banking sector in Vietnam, including short-term interest rate, inflation rate, M2 money supply, exchange rate

Observations were collected from monthly data, from 2012 to the first quarter of

2018, including 75 observations, from Vietstock.com, International Monetary Fund (IMF) and cophieu68.com The price index of banking stocks collected on the website cophieu68.vn is the closing price index of the banking sector stock to be collected on the last trading day of the month, similar to the collection of the remaining criteria’s data

Available Variables

3.2.2 Research methods

ARDL is a Self-regression VAR model Although VAR is advantageous, the ARDL model is applied in this essay due to the higher accuracy in testing the short-term and long-term relationship of the small number of variables to predict the impact of independent variables on the dependent variable, in regression analysis involving time series data, the regression model consists not only of present value but also the delay values of the explanatory variables

The ARDL model is:

DYt−n and DXt−n: variables stopping at latitudes

Compared to other regression methods, ARDL has plenty of advantages to ensure dependability when using the ARDL model, the time series variables are stop, optimal deflection, an absence of autocorrelation phenomenon and no variation in variance and functional form (Gurajati (2003)) The ARDL allows estimation of the equation even if the data sequence stops at both 0 and 1, while other models such as VAR and VECM require sequences to integrate at the same level

Assumptions of ARDL Model:

- Absence of auto correlation is the very first requirement of ARDL The model requires that the error terms should have no autocorrelation with each other

- There should not occur any heteroscedasticity in the data In simple terms, the variance and mean should remain constant throughout the model

- The data should follow normal distribution

- Data should have stationary either on I(0) or I(1) or on both In addition to this, if any of the variable in the data has stationary at l(2), ARDL Model cannot run Normally, with too small sample size, estimation of the model will not be effective However, small samples can be easily solved by the ARDL model because it allows for efficient estimation even when the number of observations is small

For unit root test, the purpose is to determine the stopping at the difference I (0)

or I (1) and the ARDL model is used for analysis According to Perasan & Shin (1997), quantitative regression based on the ARDL model is carried out in the following steps: Step 1: Determine the latency of the variables in the model by the two criteria SBC and AIC

Step 2: Bound test determines the long-term relationship between the variables of the model

Step 3: The ARDL model is used with the latency as chosen in step 2 in tandem with correlation between the variables

Step 4: Based on the ARDL approach to co-alignment, short-term regression model will

be done with ECM error correction

Step 5: Verify the diagnosis and stability by research model

As above examined, the author proposes the model in this study:

The model is used to examine the relationship between bank sector price and macro factors in the long run:

ARDL Model (Autoregressive Distributed Lag) proposed by Pesaran, Shin &

ARDL short-term equilibrium estimation model with ECM:

CHAPTER 4: RESEARCH RESULTS

be median In the ARDL model, the purpose is to study the relationship between variables in the long run, and the properties of the variables are quite sensitive to the data and sample base Most of the ARDL model studies do not mention that this feature often omits standard delivery tests to focus heavily on important tests in the ARDL, so authors

based on original research, it also delves into the core of the ARDL model and mains tests and ignores this standard distribution

Some details information about the four investigated criteria

+ Money supply M2

(Source: Data collected from Cafef.com and drawn in excel)

As illustrated in the graph, M2 money supply impacts positively on the stock price

of the banking sector It is obvious that a good investment property or not, but if there was no change in the flow of money invested, bank stock price will stay constant The growth of money supply M2 phase increased cash flow into banking stocks, leading to a surge in the value of bank stocks Another explication is that when M2 money supply is beneficial for investors because they hold the belief that the State is implementing monetary easing policy to stimulate economic growth Experiencing an upward trend, this trend is similar to the overall increase of LG

0 100 200 300 400 500 600 700 800 900 1000

+ Exchange rate

(Source: Data collected from Cafef.com and drawn in excel)

Before 2016, Vietnam witnessed the emergence of daily exchange rate imposed

by the State Bank of Vietnam due to the instability in the market when China decided to

devaluate the Yuan, instead of the stable exchange rate As is indicated, after observing

a stable trend, this rate turned to a steady upward trend, contributing partly to the boost

of bank stock price It is also noticeable that despite a roughly fixed pattern in the half

of 2017 and the first quarter of 2018 of exchange rate, bank stock price even flied

rampantly to reach the highest points, nearly equivalent to the peaks prior to economic