Examining factors affecting stock market performance in vietnam

When identiíying macroeconomicfactors affecting the stock market, it will contribute to Solutions to overcomewhen there are negative impacts of macroeconomic factors on the stock market

Examining íactors affecting stock market performance in

Vietnam

Abstract

This paper tests whether innovations in macroeconomic variables are risks thatare rewarded in the stock market Financial theory suggests that the followingmacroeconomic variables should systematically affect stock market retums: thespread between expected and unexpected inílation, GDP, FDI, exchange rateand money supply We find that these sources of data are signiíicantly iníluence

on VN-Index

Introduction

In Vietnam, the change of macroeconomic policies often happens suddenly,thus affecting the psychology of investors, the stock market (stock market) andthe general activities of the economy Thereíồre, analyzing the impact of

macroeconomic factors on the economy in general and the stock market in

particular is a necessary and useful thing When identiíying macroeconomicfactors affecting the stock market, it will contribute to Solutions to overcomewhen there are negative impacts of macroeconomic factors on the stock market

as well as help develop appropriate stock market with the economic situation.This study aims to measure the impact of six macroeconomic factors including:inílation (represented by consumer price index), M2 money supply, VND / USDexchange rate, inílation, total trading volume, gross domestic product and

íồreign direct investment to stock price indexes are being applied at VietnamStock Exchange (VN-Index) Research results show that in the long term

exchange rate, íồreign direct investment and gross domestic have a negativeimpact on stock price indexes; With inílation, money supply and total tradingvolume have a positive impact on most stock price indexes in the long term

At present, there are many articles and researches about the impact of

macroeconomic factors on the stock market However, in each time and different

conditions, the impact factors and the level of impact on the stock market will not be the

same Especially in the current condition of Vietnam stock market with many companies

was listed on stock market, the difference may be very large

In order to achieve this goal, the next chapter will present the theoretical basis of theresearch problem Aíìer that, the research method and model test results Finally,

comment on research results and conclusions

Key words: Gross Domestic Product, Foreign Direct Investment, Exchange Rate

CHAPTER 1: LITERATURE REVIEW

In Vietnam, the change of macroeconomic policies often happens suddenly, thus

affecting the psychology of investors, the stock market and the general activities of theeconomy Thereíồre, analyzing the impact of macroeconomic íactors on the economy ingeneral and the stock market in particular is a necessary and useful thing When

identifying macroeconomic íactors affecting the stock market, it will contribute to

Solutions to overcome when there are negative impacts of macroeconomic íactors on thestock market as well as help develop appropriate stock market with the economic

situation

At present, there are many articles and researches about the impact of macroeconomicíactors on the stock market However, in each time and different conditions, the impactíactors and the level of impact on the stock market will not be the same Especially in thecurrent condition of Vietnam stock market with the introduction of many new indexes inHOSE - Index such as VN30, VNMidcap, VN100, VNSmallcap, VNAllshare, the

difference may be very large

To achieve this goal, the next section will present the theoretical basis of the researchproblem After that, the research method and model test results Finally, comment onresearch results and conclusions

Moreover, there are many reasons that affect Vietnam stock market and some the mostwell-known factors are GDP, CPI, FDI, Gold, and FDI From those, I found there arethree important factors that have a strong iníluence on Vietnam's stock market that areExchange rate, Inílation, Money Supply, GDP and FDI.

1.1 Deíinitions

1.1.1 Vietnam Stock Market

The stock market refers to the collection of markets and exchanges where regularactivities of buying, selling, and issuance of shares of publicly-held companies takeplace Such Hnancial activities are conducted through institutionalized íồrmal

exchanges marketplaces which operate under a deíined set of regulations There can

be multiple stock trading venues in a country or a region which allow transactions instocks and other forms of securities (Investopia, 2019)

1.1.3 Money supply

The money supply is the entire stock of currency and other liquid instrumentscirculating in a country's economy as of a particular time The money supply caninclude cash, coins, and balances held in checking and savings accounts, and othernear money substitutes Economists analyze the money supply as a key variable tounderstanding the macroeconomy and guiding macroeconomic policy (Investopia,2019)

1.1.4 FDI

1.1.5 Foreign direct investment (FDI) is an investment made by afirm or individual in one

country into business interests located in another country Generally, FDItakes place when an investor establishes íồreign business operations or acquires

íồreign business assets, including establishing ownership or controlling

interest in a

íồreign company Foreign direct investments are distinguished from portíồlioinvestments in which an investor merely purchases equities of foreign-basedcompanies (Investopia, 2019)

1.1.6 Exchange rate

1.1.7 An exchange rate is the value of one nation's currency versus the currency of another

nation or economic zone For example, how many u.s dollars does it take to buy

one euro? As of February 23, 2019, the exchange rate is 1.13, meaning it takes $1.13

to buy €1 (Investopia, 2019)

1.1.8 GDP

1.1.9 Gross Domestic Product (GDP) is a broad measurement of a nation’s overalleconomic activity GDP is the monetary value of all the íinished goods and Servicesproduced within a country's borders in a speciíic time period

1.1.10.GDP includes all private and public consumption, govemment outlays,

investments,

additions to private inventories, paid-in construction costs and the íồreign balance oftrade (exports are added, imports are subtracted) It may be contrasted with Gross

National Product (GNP), which measures the overall production of an economy's

citizens, including those living abroad, while domestic production by íồreigners is

excluded Though GDP is usually calculated on an annual basis, it can be calculated

on a quarterly basis as well (in the United States, for example, the govemment

releases an annualized GDP estimate for each quarter and also for an entire year)

(Investopia, 2019)

1.2 Impact of different íactors on períồrmance of stock market

and stock market retums For instance, Fama and Schwert (1977) found a negative

relationship between the períồrmance of the stock market and inílation Some

signiíicant studies from Pearce and Roley (1985) and Hardouvelis (1988) showed nosigniíicant correlation between the stock retums and inílation and this proves that

there is need for further exploration into the topic To seek clarity on the relationshipbetween inílation and stock price movements, further research must be done to

investigate the behavior of the two variables This study intends to address the

question: what is the effect of inílation on stock market retums in the VSM? There are

a wide range of researches showed that how inílation affects on stock market For

example, in 1977, Fama and Schwert found a relationship between inílation and thestock market The author used expected inílation and expected inílation to considerthe impact of inílation on the stock price index and the results show that there is a

negative impact of inílation on stock prices Mohammed Omran and John Pointon

(2001) also found negative impacts of inílation on the Egyptian stock market in theshort and long term In 2011, Adel AI Sharkas and Marwan Alzoybi conducted

research on the subject of Stock prices and inílation; Experimental evidence in

countries such as Jordan, Saudi Arabia, Kuwait, Morocco With the VAR model, theauthor supported the hypothesis of the long-term impact of inílation and stock prices.Mahedi (2013) based on market efficiency inílation iníluences stock indices, where;when the inílation rate is higher than expected, which is economically bad news,

implies meaningful impact of stock retums

1.1.13.A study by Alimi (2014) also examined the long run and short run relationshipsbetween inílation and the Hnancial sector development in Nigeria over the periodbetween 1970 and 2012 The Hndings of the study íồund that that inílation presenteddeleterious effects on Hnancial development over the study period TaoTik and

Omosola (2013) explored the relationships and dynamic interactions between stockretums and inílation in Nigeria and revealed the existence of a long run relationshipbetween stock retums and inílation Ahmad and Naseem (2011) examined the impact

of high inílation on stock market retums in Pakistan using monthly data of inílationand stock retums and found that there is negative and signiíicant impact of inílation

on stock retums Krylova & Vahamaa (2004) examined the impact of inílation andeconomic growth expectations and perceived stock market uncertainty and establishedthat stock and bond prices move in the same dữection during periods of high inílationexpectations, while epochs of negative stock-bond retum correlation seem to coincidewith the lowest levels of inílation expectations In their study, Kullapomand Lalita(2010) also investigated the relationship between inílation and stock prices in

Thailand andalso explored the impact of speciíic events and revealed that that

movement of stock prices is irrelevant to inílation Kaul (1987) explains that therelationship between inílation and stock retums varies over the time in a systematicway He determines that this relationship is caused by money demand and supplyfactors Pérez de Gracia and Cunado (1999) analyze the relationship between inílationand common stock retums during the 1941-1999 in Spain, corroborating the existence

of Granger causality relationship between inílation and stock retums and, thereíồre,they disagree with Geske, Roll, and Fama: this relationship cannot be spurious Otheraltemative explanation is the theoretical Rational Expectations Equilibrium Model

of assets prices of Veronesi (1999) He concludes that stock prices overreact to badnews when the State of the economy is good and underreact to good news when theState of the economy is bad It occurs because when the announcements go against themarket tendency, the investor’s uncertainty increases and, thereíồre, the volatility ofthe market also increase

1.1.14.On the other hand, a recent paper of Li et al (2010) suggests that the relationshipbetween inílation and stock retums varies depending on the economy goes throughhigh or low inílation periods Estep and Hanson (1980) propose that this relationshipcould be neutral because the companies can transíer the increases of inílation to theprices of their Products This theory is known as Flow - Through hypothesis

(Jareno, 2005, and Jareno and Navarro, 2010) They conclude that the companies with

a higher flow - through ability are less affected by changes in inílation rate

Thereíồre, the negative effect of a rise in inílation on a firm is inversely related withits flow - through ability Díaz and Jareno (2009 and 2013) deal to explain the impact

of inílation news on stock prices taking into account, on one hand, the Veronesi’s

hypothesis and, on the other hand, the Estep and Hanson’s flow - through

hypothesis Firstly, they analyze the short run response of each sector of Spanish

economy to unanticipated component of inílation announcements, and secondly, theystudy the potential explanatory íactors of each response They observe different

reactions to unexpected inílation depending on the direction of the news and the State

of the economy They obtain evidence that the positive surprises ( bad news ) affect

in more sectors than the negative surprises ( good news ) and, moreover, the reaction

of investors is stronger when the news are bad than when the news are good (as

suggested by Veronesi) Some authors such as Oxman (2012) suggest that the

relationship between inílation rate and stock retums depends on the measure of

inílation it has utilized He concludes that all measures of inílation are positively andsigniíicantly related with risk premium but not with excess retums

1.1.15.In conclusỉon, most research found that ỉnflatỉon have a negatỉve ỉmpact on stock

market The unexpected rỉse of ỉnflatỉon ỉs generally consỉdered the mostpaỉnful, as ỉt takes companies several quarters to be able to pass along higher ỉnput costs to

consumers Lỉkewỉse, consumers feel the unexpectedprỉce when goods and Services cost more Therefore, consumers tend to ỉnvest less on stock market.

affecting stock markets is the íìmdamental analysis which can be períồrmed on threebasic levels: global, sector-specitic and corporate Factors affecting the price

behaviour not only of shares but also other securities and instruments can be furtherdivided into macroeconomic and microeconomic (e.g psychological effects) As King(1966) notes, stock markets are iníluenced by macroeconomic íactors by an average

of 50% A similar view is shared by Musílek (1997) who, unlike King, stays on thegeneral level and claims that if an investor wants to be successful, he must focusmostly on price-shaping macroeconomic íactors In regard of that the spot price ofstock present future income, which are discounted, Flannery, Protopapadakis (2002),mean that macroeconomic variables are the most important indicators, which

iníluence the stock retums, because right this factors has an impact on future

company's cash flow and iníluence the high of discount rate

1.1.17.The tirst study in modem history, which focus on effect of macroeconomic variables

on stock prices can we post e.g Nelson (1976), Jaffe a Mandelker (1977) or Fama,Schwert (1977) The impact of national macro-economic íactors on the períồrmance

of national stock market in the modem period was addressed by authors such as

Bilson, Brailsíồrd and Hooper (2000), who maintain that these íactors determine thestock prices more than the global macroeconomic íactors According to Veselá (2010)the macroeconomic íactors that iníluence the development of stock prices, includeinterest rate, inílation, GDP, money supply, the movement of intemational Capitalchanges in exchange rates, political and economic shocks According to Kohout

(2010), the most important factor iníluencing the development of stock prices in the

1.1.18 long term is the amount of money in the economy (i.e money supply) Also Flannery,

Protopapadakis (2002) include among the major macroeconomic factors the money

supply as well as unemployment, trade balance, the number of new

residential

buildings and the Producer Price Index

1.1.19.According to Maskay (2007) or Chromec (2006), the monetary policy or change inmoney supply, is one of the most effective tools available to the national Central banks

of individual countries in association with iníluencing the actual economic activity

Many authors, such as Keran (1971), Gupta (1974), Musílek (1997), Poiré (2000) orShostack (2003) consider the money supply as the instrument of the monetary policy,

to be the most important macroeconomic factor that iníluences the behavior and

development of stock prices Maskay (2007) and loannidis, Kontonikas (2006)

consider the stock market to be the basic indicator of the condition and development

of the economy strongly iníluencing and preceding it Also these authors consider themoney supply to be a strong determinant of the stock market, i.e of the entire

economy Money supply can affect stock prices directly, when there is more money inthe economy than can be utilized so they are allocated to investments But as alreadymentioned, for example, by using quantitative release results indirectly in the

reduction of the interest rates rendering the extemal íinancing cheaper, leading to

increasing investments (growth in the demand for shares) and consumption (better

economic results of companies)

1.1.20.By examining global íactors certain associations were discovered between

variables

(in this case the money supply) and the development of stock prices, using which wecan predict the future development and that represent an important guide for the

investor Most authors listing macroeconomic íactors that iníluence the development

of stock prices consider the monetary policy, or change of the money supply in the

economy to be the most important factor A statement by Gupta (1974) serves as

example, when he says that the money supply can be utilised for predicting the

development of stock markets His investigation coníirmed that 59% of the value of

1.1.21 stock indices can be predicted based on the money supply This statement is supported

by Rapach, Wohar and Rangvid (2005) who, in their analysis íồcused on theprediction of stock market development by using macroeconomic factors in 12

countries, concluded that the most trustworthy macroeconomic indicator for stock

market predictions is the interest rate Pearce, Roley (1985) in their research dealt

with the issues of anticipative money supply and concluded that there is a reciprocal

relation between the nonanticipative money supply and the development of the stock

prices As stated by these authors, the Central bank will quickly respond to this growth

by raising the interest rates, resulting in the reduction of stock prices,

relationship between the change in the u.s money supply and stock prices in the

observed period of 1918-1960 This study became the basis for the work of Mookerje(1987), Jeng, at al (1990), and Malliaris, Urrutia (1991) In this respect, a question

arises whether this relationship holds even today, that is approximately 50 years afterpublication of this pioneering study , or how massive change of the money supply

(e.g the consequences of quantitative release) during the recent íinancial crisisiníluenced the development of stock prices and how the change in the money supplyaffects the development of the stock price bubbles.

1.1.23.Other authors dealing with the correlation and link between stock markets and the

money supply are e.g Maysami, Koh (2000) who, in the conditions of the Asian

market revealed a positive relationship between the money supply and the

development of the SGX index (Singapore stock exchange), contirming the

hypothesis that a growth in the money supply will cause inílation, which causes agrowth in future cash-flow and share prices, as already investigated by Fama (1981).The same results coníirm Maysami, Howe a Hamzah (2004), who disclose a positivedependence between money supply change and stock price evolution on Singapurestock exchange The causality between money supply and stock markets on emergingmarkets was investigated also by Brahmasrene and Jiranyakul (2007), speciíically intheir analysis of the Thai stock market between 1992 and 2003, where they found apositive relations between money supply and stock prices Cagli, Halac and Taskin(2010) dealt with the relationship between money supply and stock prices on anotheremerging market - the Turkish market These authors did not coníirm any co-

integration between these variables The effects of the changes in macroeconomicíactors (including the money supply) on the development of stock prices were

discussed also by Shaoping (2008), who coníirmed a vary strong effect of the moneysupply on the development of stock prices in the period between 2005-2007 As

stated, he found a long-term and stable relationship between stock prices and

monetary aggregate M0, MI and M2 Similarly, stock prices and money supply had apositive co-integration A positive co-integration has thus resulted that the growth ofmoney supply results in the rising prices of equity shares The authors say that a

loose monetary policy makes stock markets grow and, on the contrary, a restrictivepolicy causes share prices to fall They show how market íluctuations correspond tochanges in monetary policy The issues of efficiency of the stock market in Malaysiaand co-integration between money supply and stock prices were discussed by

Habibullah, Baharumshah (1996), who deTined a weak efficiency and non-existent integration between money supply and stock prices at this market However, in a later

co-study, Habibullah (1998), found a causal relationship between money supply and

1.1.24.stock prices In the Japanese market, Kimura, Koruzomi (2003) discovered norelationship between the change in the money supply and the development of stock

prices

1.1.25.In a stock market in Pakistan, the analysis of long-term relationship between moneysupply and stock prices was períồrmed by Husain, Mahmood (1999), who discovered

a long-term co-integration between the stock prices and money aggregates MI and

M2 using the cointegration test The positive relationship between macroeconomic

indicators (including the money supply) is also demonstrated by Hanousek, Filler

(2000) who conílrmed a positive relationship between money supply and stock prices

in the conditions of Central Europe in 1993-1996 Positive correlation and causal

relationship between money supply and stock prices in the u.s market have been

shown in by Maskay (2007) and Flannery, Protopapadakis (2001), Poiré (2000) in

their respective studies As stated by Habibullah, Baharumshah (1996), in the

conditions of the u.s stock market there a positive iníluence of the money supply on

the development of stock prices was found by Malliaris, Urrutia (1991), Mookerje

(1987) and Jeng, et al (1990)

1.1.26.As further stated by Husain, Mahmood (1999), Rozeff (1974) in his study revealedthe effectiveness of the u.s stock market in relation to money supply, while Kraft,

Kraft (1977) found no causal relationship between the equity retums and changes in

money supply in the same market

1.1.27.Based on the review of literature resources, it can be concluded that among thedifferent authors, there is inconsistency between the change in money supply and thedevelopment of stock markets - see for example the results of Habibullah,

Baharumshah (1996) and Habibullah (1998) Moreover, according to the economic

theory, there should be a causal relationship between the change in the money supplyand the development of stock prices (see the next section), as discovered by some

authors, but not by others, altematively they discovered only a relationship between

one of monetary aggregate and stock prices, but not in case of another one Some

1.1.28 authors suggest a strong link (Sprinkel (1964), Malliaris, Urrutia (1991), Jeng, et al.

(1990)) and the relationship between the change in money supply and the

development of stock prices On the other hand, other authors (Kraft, Kraft (1977),Bianying (2004), Kimura (2003)), found no causal relationship For example,

Kulhanek (2006) and Veselá (2007) identiíied a link between changes in the moneysupply and stock prices, but point out a gradual weakening of this link

1.1.29.Money supply, as the most ỉmportant macroeconomỉc factor that affects the stock

prỉces ỉs recognỉzed byMaskay (2007), Dwyer, Hafer (1999), Sprỉnkel (1964), Poỉére

(2000), Musílek (1997), Kohout (2010), Nývltová, Rezháková (2007) According to

Veselá (2007) the money supply also acts as the predỉctỉng ỉndỉcator of the

development of equỉty prỉces There are several theoretỉcal arguments supportỉng the

assumptỉon that the growth of the money supply ỉncreases the demandfor stocks and

hence theỉr prỉces.

1.1.30 1.2.3 Exchange rate

1.1.31 At a time when the dollar was convertible into gold, the íồreign exchange marketwas one of the quietest markets

1.1.32.However, nowadays the exchange rate is increasingly íluctuating and it is impossible

to predict it with certainty in the current (íloating) exchange rate System Indeed, this

íluctuation will have major effects on the Hnancial market

1.1.33.In the literature, several authors have asserted the existence of a relationship betweenthe exchange rate and the stock index Yet, the results of each study are sometimes

different and even contradictory

1.1.34.On the one hand, among the íirst works dealing with exchange rate uncertainty is

Aggarwal and al (1981), the authors used us monthly data and made simple

regressions The results of this study showed that stock prices and exchange rates are

1.1.35 positively correlated The authors explained this relationship by the factthat the stock

market was an efficient information process incorporated into the exchange rate

1.1.36.On the other hand, Soenen and Hennigar (1988) following Aggarwal (1981) and

conducted their study on the American market between 1980 and 1986, they used

cointegration test as well as simple regressions However, these authors found that the

iníluence of the exchange rate on the us stock price was rather negative because they

took a larger sample than that of Aggarwal (1981), which can be considered the most

accurate because it is closest to reality with a larger and wider sample

1.1.37.Using Markov Switching (MS) modeling, Walid Chkili (2011) also studied the

relationship between these two macroeconomic variables after the subprime crises for

four emerging countries (Hong Kong, Singapore, Malaysia, Mexico) by dividing the

period into two phases (turbulent and calm) Following the application of the

MS-EGARCH model introduced by Henry (2009) in order to investigate the relationship

between short term interest rates and the UK equity market he came to a conclusion

that the relationship between stock markets and íồreign exchange markets is

regimental and that stock price volatility responds asymmetrically to events In

addition, exchange rate changes play an important role in determining the transition

between quieter and more turbulent periods in emerging equity markets

1.1.38.More recently, Anshul and Biswal (2016) conducted a study on the relationship

between global prices of gold, crude oil, the USD-INR exchange rate, and the stock

market in India Based on the 10-year daily data, they used the DCC-GARCH models

Dynamic Conditional Correlation, Engle (2002) to study the relationship between the

exchange rate and the Sensex30 Indian stock index, which indicates that there is a

correlation between these two variables Their results showed that a depreciation of

the Indian Rupee causes a fall in Sensex30

1.1.39.During the same year, Lu Sui, Lijuan Sun aimed to examine the dynamic relationshipbetween local stock market retums, exchange rates, the BRICS zone (Brazil, Russia,

1.1.40 India, China, and South Africa) The authors have been able to find signiíicant effects

between exchange rates and stock market retums by the VAR model, suggesting that

exchange rate volatility can affect the performance of a firm or an industrial sector.Thus, an appropriate exchange rate can stabilize the stock market, especially during

the tinancial crisis

1.1.41.Noel Dilrukshan Richards and John Simpson have done research on the interaction

between stock prices and exchange rates in Australia The author through veriíication

of co-integration and the Granger model has seen the level of interaction of exchange

rates on stock prices With observations in the period of 2003-2006, the study showed

that in the short term, the increase in the exchange rate has a positive impact on the

price of the Australian stock market Moreover, when conducting co-integration tests,

the results also show that there is a long-term impact of exchange rates on stock

prices.Some other studies have found conílicting results such as Rahman and Uddin

(2009) studying the impact of exchange rates on stock price indexes in some

developing countries like Bangladesh, India and Pakistan The results show that there

is no relationship between exchange rates and stock prices in these countries in the

long term Yu (1997) conducted the study by using daily data for the period

1983-1994 on three Asian countries Hong Kong, Tokyo and Singapore He brought the

facts that a bidirectional relationship exists in Tokyo while Singapore market has

unidirectional relationship i.e., changes in exchange rate to changes in stock prices

Abdalla and Murinde (1997) investigated the relationship between the two variables

in four Asian countries for the period 1985-1994 by using co integration approach in

the long run and come up with the conclusion that no causality exists in Pakistan and

Korea while supported its presence in India and Philippines Pan et al (2001)

examined that exchange rates are signiíicantly correlated with stock markets in seven

Asian countries by using the data for the period 1988-98 Rittenberg (1993)

investigated the relationship between stock price and exchange rate in Turkey by

applying Granger causality tests and found that there is a unidirectional relationship

1.1.42 that runs from price level changes to exchange rate changes but there

variables and in some case, it was unidirectional with negative interaction whilebidirectional in the others Ali Kemal and Haider (2005) conduct the study on

Pakistani data in short run to find the movements of exchange rate with the

changes in

prices, interest rates, íồreign reserves and trade balances They find the facts thatchanges in real exchange rate and nominal exchange rates are highly correlated and

no signiíicant correlation exist between relative prices and nominal exchange rate.Bhattacharya and Mukherjee (2003) also support the Hndings that there is no

interaction between stock price and exchange rate Muhammad and Rasheed

performed co-integration and Granger Causality test in 2002 to find out the

1.1.43.In conclusỉon, exchange rates are stỉll a contender factor because there are many

results Mas generated after each research and all studỉes showed dỉfferent results lỉke

posỉtỉve, negatỉve or even no relatỉon between exchange rate and stock market.

1.1.44 1.2.4 Foreign Direct Investment

1.1.45 It is generally recognized that a strong Hnancial System guarantees the economicgrowth and stability Stock market is an integral part of the Hnancial System of the

economy It is a source of Hnancing a new venture based on its expected proíitability

The stock market is replica of the economic strength of any country To boost

investment, savings and economic growth, the development of stock market is

imperative and cannot be ignored in any economy Theoretical work shows the

1.1.46 positive effect of stock market development on economic growth (Demirguc-Kunt

and Levine 1996a; Sing, 1997; and Levine andZervos, 1998) The development ofstock market is the outcome of many íactors like exchange rate, political stability,(Gay, 2008), íồreign direct investment, and economic liberalization (Adam andAnokye et al, 2008)

1.1.47.In the era of globalization, FDI is a major source of Capital inflow in most of

developing economies where it bridges the gap of Capital, technology, managerial

skill, human Capital formation and more competitive business environment The role

of FDI in economic development is found mixed in economic literature It is argued

on the one hand, that FDI in developing countries transíers business know-how and

technology (Romer (1993) On the other hand, some predict that FDI in the presence

of pre-existing trade, price, íinancial, and other distortions will hurt resource

allocation and hence slow economic growth (Brecher and Diaz-Alejandro, 1977;

Brecher, 1983; Boyd and Smith, 1999) Some studies show that FDI does not exert

any independent iníluence on economic growth (Carkovic and Levine, 2002) FDI

inflows have a positive effect on host country’s economic growth in developing but

not in developed economies (Johnson 2005) Thus, theory produces ambiguous

predictions about the growth effects of FDI Some models suggest that FDI will only

promote economic growth under certain policy conditions

1.1.48.The role of FDI in the development of stock markets of developing economies is

considered very strong It is observed that there is triangular causal relationship

between these two; FDI stimulates economic growth; Economic growth exerts

positive impact on stock market development and implication is that FDI promotes

stock market development (Adam and Anokye et al, 2008) Given this background,

the aim of the present study is to identify in general the major contributing íactors to

the development of India stock market with particular emphasis on the role of FDI

The question concemed is the complementary or substituting role played by FDI in

stock market development of India It is hypothesized that if FDI plays

1.1.49 complementary role there is positive relationship between FDI and stock market

development and if it is substituting there is negative relationship between these two

1.1.50.A considerable research on determinants of íinancial sector development has beendone in economic literature For example, Adam and Anokye et al (2009) in their

study examined the impact of FDI on stock market in Ghana by using muhivariate co

integration and Innovation Accounting Methods Their resuhs indicate a long-run

relationship between FDI, nominal exchange rate and stock market development in

Ghana

1.1.51.Chousa, and Krishna et al (2008) tried to assess whether stock markets are simplyknown to be mother of all speculative businesses, or whether they are importantly

linked to attract firm level FDI in the form of cross-border Mergers & Acquisitions

activities They applied pooled regression technique by covering nine leading

emerging economies for the period of 1987-2006 They found a strong positive

impact of stock markets on cross border mergers & acquisitions deals and values

Robert (2008) analyzed the effects of exchange rate and oil prices on stock market

retums for four emerging economies using the Box-Jenkins ARIMA model No

signiíicant relationship was found between exchange rate and oil prices on the stock

market index prices Yartey (2008) identiíies many factors like institutional and

regulatory reíồrm, adequate disclosure and listing requirements and fair trading

practices important for íồreign investment

1.1.52.A considerable research on determinants of íinancial sector development has beendone in economic literature For example, Adam and Anokye et al (2009) in their

study examined the impact of FDI on stock market in Ghana by using multivariate co

integration and Innovation Accounting Methods Their results indicate a long-run

relationship between FDI, nominal exchange rate and stock market development in

Ghana

1.1.53.Chousa, and Krishna et al (2008) tried to assess whether stock markets are simplyknown to be mother of all speculative businesses, or whether they are importantly

linked to attract firm level FDI in the form of cross-border Mergers & Acquisitions

activities They applied pooled regression technique by covering nine leading

emerging economies for the period of 1987-2006 They found a strong positive

impact of stock markets on cross border mergers & acquisitions deals and values

Robert (2008) analyzed the effects of exchange rate and oil prices on stock market

retums for four emerging economies using the Box-Jenkins ARIMA model No

signiíicant relationship was found between exchange rate and oil prices on the stockmarket index prices Yartey (2008) identiíies many factors like institutional and

regulatory reíồrm, adequate disclosure and listing requirements and fair-trading

practices important for íồreign investment

1.1.54.The relationship between stock market development and economic growth in Indiawas investigated in the empirical study by Shabaz et al, (2008) They found longrunbi-directional causality between stock market development and economic growth

However, for short-run their results showed one-way causality i.e., from stock marketdevelopment to economic growth Singh (1997) also found positive relationship

between economic growth and stock market development Naceur et al (2007)

investigated the role of stock markets in economic growth and identiíied the

macroeconomic determinants of stock market development in the Middle Eastem andNorth African region They found saving rate, Hnancial intermediary, stock market

liquidity and the stabilization variables as important determinants of stock market

development

1.1.55.Sarkar (2007) established the relationship between stock market development andCapital accumulation in developing countries He applied the ordinary least square

technique (OLS) on time series data of 37 developed and less developed countries

over the period 1976-2002 and showed that in the majority of cases (including France,

UK and USA) the stock market tumover ratio an important indicator of stock market

1.1.56 development- has no positive long-term relationship with gross fixed Capital

formation

1.1.57.De la Torre, and Augusto (2007) studied the effects of reforms on domestic stockmarket development and intemationalization by performing regressions on two

variables: market capitalization and value traded by covering the period 1975-2004

for 117 countries They concluded that reforms tend to be followed by increases in

domestic market capitalization and trading

1.1.58.Fritz and Mihir et al (2005) made an effort to explore the relationship between

outbound FDI and levels of domestic Capital formation through regression analyses

for a much broader sample of countries for the 1980s and 1990s and concluded that it

had been natural to assume that tồreign investment came at the expense of domestic

investment Claessens, Daniela et al (2002-03) studied the determinants of Stock

market development across the globe, the causes of intemationalization and the

effects on local exchanges by examining the data of 77 countries from January, 1975

to November, 2000 They concluded that the global migration of funds was beneticial

for the stock market development due to more funds for corporations and more

ílexibility for investors Krkoska (2001) explored the relationship between FDI and

gross tixed Capital formation in transition countries and showed that Capital formation

is positively associated with FDI Garcia and Liu (1999) estimated the

macroeconomic determinants of stock market development particularly stock market

capitalization by using pooled data on fifteen industrialized and developing countries

for the period of 1980-1995 The results showed that real income, saving rate,

tinancial intermediary development, and stock market liquidity are the important

determinants of stock market development Macroeconomic volatility did not prove

signiíicant Errunza (1983) found long term impact of tồreign Capital inflows on stock

market development

1.1.59.In summary, studỉes have been conducted on eỉther to examỉne the effect of foreỉgn

dỉrect ỉnvestment on economỉc groMth or stock market development on economỉc

1.1.60 growth but lỉttle or no study has jointỉy anaỉyzed the effect of foreỉgn dỉrect ỉnvestment

and stock market development on economỉc growth, thus thỉs ỉs the tenet of thỉs study

1.1.61 1.2.5 Gross Domestic Product

1.1.62.Economic growth is measured in terms of an increase in the size of a nation’s

economy A broad measure of an economy’s output A most widely used measure of

economic output is the Gross Domestic Product Gross Domestic Product (GDP), a

calculation method in national accounting is deíined as the total value of íinal goods

and Services produced within a country's borders in a year, regardless of ownership

GDP measures only íinal goods and Services, that is those goods and Services that are

consumed by their íinal user, and not used as an input into other goods Measuring

intermediate goods and Services would lead to double counting of economic activity

within a country This distinction also removes transfers between individuals and

companies from GDP (Reddy, 2012)

1.1.63.There are three approaches to calculating GDP with al rendering same results

• Expenditure Approach: Calculates the íinal spending on goods and Services

• Product Approach: Calculates the market value of goods and Service produced

• Income Approach: Sums the income received by all Products in the country

1.1.64.According to (Jhingan, 1997), economic growth occurs when an economy’s

productive capacity increases, which in tum is used to produce more goods and

Services Economic growth is measured by increase in the amount of goods and

Services that are produced in a country Thereíồre, a growing economy produces more

goods and Services each successive time period Economic growth is obviously

iníluenced by some íactors These íactors are growth inducing íactors which have

been identiíied by (Aíồlabi, 1999) and (Jhingan, 1997) as land, labour, Capital,

human Capital, education, training, health and productivity

1.1.65.A number of diff erent claims about the relationship between stock markets and theeconomic activity were provided empirically Some researchers (Fama, 1981;

Schwert, 1990; Mauro, 1995) coníirmed the existence of this relationship, contrary

the other group of researchers (Binswanger, 2000 and 2004; Mao and Wu, 2007)

argued that any possible relationships between stock markets and the economic

activity were breached at the beginning of the eighties of 20 century and thereíồre anychange in stock prices cannot be explained on the basis of changes in the economy In

a number of studies are also analyzed the causal relationships between the stock

markets and the economy Demetriades and Adriánová (2003) evaluated the direction

of these causal links One possibility is that the Hnancial market reacts to the

economic development of a respective country If the real economy grows, the

volume of savings in the Hnancial System grows as well Thus, the Hnancial System isable to provide more Hnancial sources to those who need them The other possibility

is that the well-functioning Hnancial market stimulates the economic growth In

accordance to these two different possible links reciprocal causal relationships may beexpected However, any causal effect of Hnancial markets on the economic activity

were not unambiguously proved This is probably caused by many factors which may

be as follows: investments into unproductive activities as the result of microeconomicinefficiency of the banking System whereas the banks are unable to solve the

problems with the transmission of information quickly and effectively An altemativeexplanation for inefficiency of banking activities may be the inappropriate political

interíerence in the banking System The causal effect of the fi nancial market on theeconomic development may also indicate some macroeconomic problems, such as ahigh degree of political or economic uncertainty appearing for example in the form ofunpredictable inílation

1.1.66.Many authors íồcused on the analysis of the causal relationships between íinancialmarkets and the economy within one country rather than within multiple set of

countries Mao and Wu (2007) identiíied a long-term mutual causal relationship

1.1.67 between the Australian stock market and the economic activity, while Fama (1990),

Schwert (1990) and Mauro (1995) argued that increasing performance of the stockmarkets may have beneíicial effects for the enhancing of economic efficiency.However, studies employing the Nonvegian (Gjerde and Saettem, 1999) or theKorean data (Know and Shin, 1999) rejected that the economic output is

determined

by the efficiency on the stock market

1.1.68.In general, the results of researchers employing the data of one country differ

according to the economic development of a respective country For example, Kaplan

(2008) employing the Turkish data identiíied a long-term relationship between the

stock market and the economy and proved that the stock market has the causal effect

on the economic output Based on his results the stock market may be considered as

the main determinant of the future economic activity Adamopoulos (2010) analysing

the relationship between the German economy and the stock market concluded

similarly However, the results of Kaplan study (2008) were refused by more recent

study of Goktas and Hepsag (2011) They coníirmed the existence of a causal

relationship between stock market’s outputs and the economic activity with the lag of

six months, however the identiíied direction is from the economy to the stock market

output These controversial results may be caused by different methodology; since

Goktas and Hepsag (2011) took into consideration the seasonal behavior of the time

series and thereíồre utilized the HEGY seasonal unit root test, while Kaplan (2008)

did not

1.1.69.As was mentioned above, the results of studies analyzing the direction of the

relationship between stock markets and the economy may diff er depending on the

economic development of a respective country In accordance to that the authors

recently switched their interest from developed countries to emerging ones Among

them, Chakraborty (2008) examined the relationship between the Indian Hnancial

market and economy He concluded that the development of the Indian Hnancial

market affects the economic activity, but this relationship is relatively weak Further,

1.1.70 Ibrahim (2010) stated for the Malaysian sample that the stocks retums may be

considered as the main indicator of the future economic activity, but only for theperiod shorter of one year

1.1.71.The iníluence of stock markets of five European countries (Germany, France,

Netherlands, Italy and the Great Britain) on their economic efficiency was analyzed

by Siliverstovs and Duong (2006) Although the identiíied links were not statistically

signiíicant, they noted that the economic development positively responds to positive

shocks taking place on the stock market and also that the stock markets of analyzed

countries imply certain information for the íồrecast of the economic activity

1.1.72.Similarly, Domain and Louton (1997) analyzing the causal relationship between stockmarket retums and the economic efficiency taking into account the asymmetry of the

business cycle noted that the Sharp declines in the economic períồrmance are caused

by the decline on stock market retums, whereas the positive períồrmance of the stocks

market is followed by the increase of economic output

1.1.73.Fama (1990) and Binswanger (2000) in their studies also suggested that monthly datahave a little explanatory power for the analysis of the relationship between stock

markets and the economic activity and quarterly or annual data seem to be more

appropriate Ibrahim (2010) also noted that irrespective to the fact that many studies

contest the predictive ability of stock prices, their easy availability and exact

measurements favouring them as the predictive indicator in comparison with other

macroeconomic variables which are usually available with a long-term delay and

whose values have to be often modiíied

1.1.74.As to emerging markets, Nishat and Shaheen (2004) infer that industrial production isthe largest positive determinant of stock prices in Pakistan, as well as bilateral

Granger cause between industrial production and stock prices Naka, Mukherjee and

Tufte (1998) indicate that industrial production is the largest positive determinant of

Indian stock prices Additionally, domestic output growth is its predominant driving

force to Indian stock market períồrmance Maghayereh (2002) and Al-Sharkas (2004)

1.1.75 for Jordan and Maysami et al (2004) for Singapore indicate that

industrial production

is positively and signiíicantly related to the stock retums Abugri (2008) reports thatthe response of stock retums to industrial production are positive and signiíicant inBrazil and Chile, while industrial productions do not appear to exert a signiíicantimpact on the expected stock retums in Argentina and Mexico Adam and

stock retums and industrial production is positive and the relation between stock

retums and trade balance is negative Furthermore, the tindings of the study indicatethat the ISE is neither the result variable nor the cause variable of any macroeconomicvariable The results of Yildirtan (2007) evidence that there is a linear relation

between imports, exports and the stock retums According to the results of Ozturk(2008), the stock retums do Granger causes tồreign investor transactions, currentaccount deficit/GNP and industrial production index Kandir (2008) and Tursoy et al.(2008) indicate that industrial production does not appear to have any signiíicanteffect on stock retums It is expected to have the effect of increasing the amount ofCapital invested in stocks as well as increasing stock prices

1.1.77 In conclusỉon, there are no studỉes shoMỈng that GDP has a strong

Hypothesis 1 (Inílation)

1.1.80.As for the stock market, when inílation increases, interest rates will increaseaccordingly to ensure positive real interest rates and stock market become lessattractive than other investment channels such as saving deposits from which tosupply bigger than stock demand and cause stock price decline In addition, wheninílation increases, it will increase the company's input costs and affect the

company's proíit, and it is expected to be the íactor that decrease the stock

prices.

2.1.2 Hypothesis 2 (Money Supply)

1.1.81.The analysis of economic theories shows the impact of monetary policy on stockprice indices When implementing an expansionary monetary policy, the amount

of money put into circulation will reduce the lending rate as well as the discount

rate This will increase the need to use Hnancial assets including stocks On the

other hand, when the lending rate falls, it will help lower the discount rate of the

stock thereby increasing the expected price as well as the income of investors Onthe contrary, when implementing tight monetary policy, the interest rate will be

higher because the amount of circulation has decreased compared to beíồre the

change of policy When higher interest rates will make Capital costs higher than

beíồre, thus it is expected to have the effect of reducing the amount of Capital

invested in stocks as well as reducing stock prices.

2.1.3 Hypothesis 3 (Exchange Rate)

1.1.82.According to economic theories, exchange rates can affect stock prices in twodifferent directions When the exchange rate rises in the way of direct pricing, the

1.1.83 local currency will depreciate in addition to a stable investment environment that

will attract more íồreign Capital to invest in the country to seek proílts and enjoyprice difference However, according to another aspect, the increase in the

exchange rate has a negative impact on the stock market When adjusting theexchange rate increases, it will affect export activities; indirectly affect the

economic growth as well as production activities of the company, thereby

affecting the proíltability of the company., and stock price is expected to decreased.

2.1.4 Hypothesis 4 (GDP)

1.1.84.As shown in the literature on the subject, there is no doubt that stock prices are

closely connected to real economic activity through a number of different

channels However, the literature provides conílicting results on the causal

direction of the underlying relationship; i.e empirical literature provides mixed

results on the relationship between stock markets and real economic activity

Several empirical studies in the literature suggest that there is a strong relationship

between stock market performance and the real economic activity Some other

studies, however, provide evidence that stock market períormance positive

impact on real economic activity and arguing that price movements can be

increase by fundamental factors implying that the link between stock prices and

real economic activity is positively

2.1.5 Hypothesis 5 (FDI)

1.1.85.The relationship between FDI and stock market development has been widely

discussed in economic literature (see for example, Errunza, 1983; Gracia and Liu,

1999; Yartey and Adajasi, 2007; and Adam and Anokye et al 2009) The role of

FDI in stock market development is twofold It may either complement or

substitute the development of stock market In the íormer case a positive sign

and in the latter case a negative sign is expected.

1.1.98.E

1.1.102

CPI 1.1.103.4.612 1.1.104..007 1.1.105.51.1.106

M2 1.1.107.14.740 1.1.108..755 1.1.109.51.1.110

Volume 1.1.111.13.413 1.1.112..958 1.1.113.51.1.114

- Inílation: Inílation factor will take the consumer price index (CPI) as a

representative; is the percentage change every month compared to the sameperiod last year Data source from Vietnam General Statistics Office

- Exchange rate: Take the exchange rate between the USD / VND on the

interbank average on the last day of the month announced by the SBV on the

website

- Foreign Direct Investment: It is obtained according to the amount of registered

Capital Source from Foreign Investment Agency, World Bank and Web site

https://vietstock.vn/

- Gross Domestic Product: Is a quarterly increase compared to the same period

last year Source from the General Statistics Office and the website of

Vietstock

2.2.2 Research model

1.1.123 Macroeconomic factors affecting the stock price index are money supply, interestrate, inílation, exchange rate, gross domestic product Using SPSS software will

help identify macroeconomic factors that actually affect the dependent variable

and impact level This method will eliminate inappropriate variables and limit

unnecessary variables in the research model because othenvise, the estimated

results will be inaccurate

1.1.124 One of the assumptions of the classical regression model is that the independentvariables must not be random If we estimate the time series model with

independent variables not stopping, then the assumption of the least squares

method will be violated (expectation of variance, variance and covariance in

constant time) leads to the use of inefficient t and p tests (also known as false

regression)

1.1.125 After identifying the data are available, it is necessary to run the regression model

to determine the impact between the dependent variable of stock price indexes

and the independent variables of inílation, interest rate, supply money, exchange

rate, industrial output value, tồreign direct investment and the degree of impact of

independent variables on explanatory variables

1.1.126 The speciíic research models that have made the íồundation for the author'sresearch include 9 main models As follows:

1.1.127 - One is about the model of Levine and Zervos (1996) as pioneering researchersclarifying this relationship, the íìmction of the relationship is given as follows:

1.1.128 Growthị =aXị +bSTOCKị +nif

1.1.130 x t : Including govemment spending variables, public investment, public

development assistance, íồreign direct investment, inílation

1.1.131 M t - is the error, a and b are unknown parameters to be estimated.

1.1.132 Levine and Zervos (1996) proposed this íồrmula to assess stock marketdevelopment to long-term economic growth The study concluded that GDP is

positively related to public investment, public spending, public development

assistance, íồreign direct investment and stock market development index

1.1.133 Two is about the model of Griffin (1998) showed that we need to add dimension The

depth, the lidquid of al the stocks available on market to assess stock market Thus,

he suggest that add three more variable on model of Levine and Zervos to understand

it very clearly and understandably about stock market

1.1.134 GroMthị = a X Ị + bỵMCapị + b2Lỉquỉdị + b^GonCị + lìì/

1.1.136 Growtht and mt :same as research one

1.1.137 MCapt; Market capitalization ratio

1.1.138 Liquidp liquidity ratio

1.1.139 Concý Four-firm concentration ratio