MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY - oOo - ĐỖ NGỌC ANH RELATIONSHIPS BETWEEN VIETNAM’S STOCK PRICES AND UNITED STATES’ STOCK PRICES, EXCHANGE RATES, GOLD PRICES, CRUDE OIL PRICES MASTER THESIS Ho Chi Minh City – 2011 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY o0o - ĐỖ NGỌC ANH RELATIONSHIPS BETWEEN VIETNAM’S STOCK PRICES AND UNITED STATES’ STOCK PRICES, EXCHANGE RATES, GOLD PRICES, CRUDE OIL PRICES MAJOR: BANKING AND FINANCE MAJOR CODE: 60.31.12 MASTER THESIS INSTRUCTOR: Dr VÕ XUÂN VINH Ho Chi Minh City – 2011 i ACKNOWLEDGEMENTS First of all, I would like to express my deep gratitude to Dr Vo Xuan Vinh for his kind supervising my thesis work, providing sources, especially software, documents related to this thesis, and giving me invaluable instructions and criticism Throughout my thesis preparation, Dr Vinh provided great encouragement and teaching I would like to thank all the authors of many reference sources for providing many precious theories, ideas as important input of my research I am also grateful to the professors and visiting lecturers of University of Economics Hochiminh City for the enthusiasm and expertise to transfer me the invaluable knowledge and insights during the MBA courses I want to extend my appreciation to my classmates, my friends who make great contribution in collecting data and give me encouragement Without their help and sharing, I could not successfully complete this MBA program and the thesis Finally, special thanks are for my colleagues and my family, who have understood, encouraged and created as much better conditions as possible for me to continue studying until the end of the course and completing this thesis ii ABTRACT The thesis investigates the relationships between Vietnam’s stock prices and the US’ stock prices, foreign exchange rates, gold prices, crude oil prices Using the daily data from 2005 to 2010, the results indicate that Vietnam’s stock prices are influenced by crude oil prices In addition, Vietnam’s stock prices are also affected significantly by US’ stock prices, foreign exchange rates over the period before the 2008 Global Financial Crisis There are evidences that Vietnam’s stock prices are highly correlated with US’ stock prices, foreign exchange rates and gold prices for the same period Furthermore, Vietnam’s stock prices are cointegrated with US’s stock prices before and after the crisis, foreign exchange rates, gold prices and crude oil prices just during and after the crisis Keywords: Vietnam’s stock prices, US’ stock prices, US Dollar - VN Dong exchange rates, gold prices, crude oil prices, correlation, cointegration, Granger causality iii TABLE OF CONTENTS ACKNOWLEDGEMENTS i ABTRACT .ii TABLE OF CONTENTS iii LIST OF TABLES iv ABBREVIATIONS v CHAPTER 1: INTRODUCTION 1.1 Background and problem statement 1.2 Research objectives 1.3 Research methodology 1.4 Research structure CHAPTER 2: LITERATURE REVIEW .5 CHAPTER 3: METHODOLOGY 11 3.1 Methodology 11 3.1.1 Correlation 11 3.1.2 Cointegration 11 3.1.3 Unit root 13 3.1.4 Granger causality 16 3.2 Data 17 3.2.1 Data descriptive statistics 17 3.2.2 Time differences 18 CHAPTER 4: EMPIRICAL RESULTS 19 4.1 Descriptive statistics 19 4.2 Correlation test 24 4.3 Unit root test 28 4.4 Cointegration test 30 4.4.1 Bivariate cointegration test 30 4.4.2 Multivariate cointegration test 32 4.5 Granger causality test 34 CHAPTER 5: CONCLUSION 36 REFERENCES 38 iv LIST OF TABLES Table 1a: Summary statistics of daily prices 20 Table 1b: Summary statistics of daily returns .23 Table 2a: Correlations among the daily prices 25 Table 2b: Correlations among the daily returns 27 Table 3a: Unit root tests for the daily prices 28 Table 3b: Unit root tests for the daily returns at level ADF test statistic 29 Table 4: Bivariate cointegration test result 31 Table 5: Multivariate cointegration test result .33 Table 6: Granger causality test result 35 v ABBREVIATIONS S&P 500 Index Standard and Poor's 500 Index USD/VND United States Dollar - Vietnam Dong exchange rate VN-Index Vietnam Stock Index listed on the Ho Chi Minh City Stock Exchange CHAPTER 1: INTRODUCTION 1.1 Background and problem statement Stock prices are one of economic indicators which move in the same direction as the economy and are used to forecast the health as well as the growth of the economy Thus, an examination of the main economic factors’ impact on stock indices has an important implication for both the government and investors This thesis investigates the long and short-run relationship between Vietnam’s stock prices (VN-Index) and United States’ stock prices (S&P 500 Index), United States Dollar - Vietnam Dong exchange rates, gold prices, crude oil prices covering a fiveyear time frame before and after the 2008 Global Economic Crisis because of the following reasons: Standard and Poor's 500 Index (S&P 500 Index) is a capitalization-weighted index of 500 stocks The index is designed to measure performance of the broad United States’ economy through changes in the aggregate market value of 500 stocks representing all major industries The index was developed with a base level of 10 for the 1941- 43 base periods Thus many mutual funds, exchange-traded funds, and other funds such as pension funds, are designed to track the performance of the S&P 500-Index and hundreds of billions of US dollars have been invested in this Furthermore, S&P 500 Index is also considered as a leading indicator for stock price indices in many countries around the world In Vietnam, there are a lot of investors and trade magazines using S&P 500 Index to presage the fluctuation of VN-Index However, to the best of the author’s knowledge, there is none of the published research investigates the relationship between them, just very simple analyses by drawing some graphs According many researchers, exchange rates are considered one of factors influencing stock prices significantly and vise versa Exploring the relationships between two variables is very meaningful to governments, multinational corporations and investors Firstly, they may be the basis for the governments’ decisions about the monetary and fiscal policy When the policy-makers decide to expand or contract their countries’ monetary and fiscal policies targeted at neutralizing the interest rate and real exchange rate or to depress their domestic currency value in order to boost the export, they should be aware how such policies effect to the stock market Secondly, the knowledge about the relationship between two variables may help the multinational corporations to predict the fluctuations in the exchange rate relying on the changes in stock prices and hence to manage their exposure to foreign contracts, exchange rate risk and stabilize their earnings Thirdly, currency has been increasingly included as an asset in the investors’ portfolios Thus, the more accurate the investors estimate of the variability of a given portfolio, the more benefit they will achieve Last, the analysts believe that understanding the linkage between currency and stock markets may help to foresee a crisis like the Asian Financial Crisis in 1997 The collapse of the stock markets in this crisis is thought to be caused by the sharp depreciation of Thai baht triggering the dropping of other currencies in the region In addition, gold has been increasingly added to investors’ strategic asset allocations, both directly and indirectly because of its diversification benefits and potential role as a hedge against the inflation, deflation, political unrest and currency risk (Faff and Chan, 1998, Jaffe, 1989, Mahdavi and Zhou, 1997, Worthingtona and Pahlavanib, 2007) as well as stocks, bonds on average and as a safe haven for both stocks and bonds in a case of market crash (Baur and Lucey, 2010) Furthermore, the crude oil price is determined the cost of a country and usually used to analyse the economic growth There are many researches having focused on the relationship between crude oil price and economic indicators and commodities (Gisser and Goodwin, 1986, Hamilton, 1983), the impact of oil price changes on these economic indicators (Hakan et al., 2010, Mussa, 2000, Schneider, 2004) The results show that there are the long-run and two-way feedback relations between the crude oil prices and stock prices (Wang et al., 2010) 1.2 Research objectives The purpose of the study is to suggest the answers to the following critical issues Firstly, are there relations between the pairs of VN-Index and S&P 500 Index, VN-Index and gold prices, VN-Index and US Dollar - VN Dong exchange rates, VN-Index and crude oil prices? Secondly, are there lead-lag relationships between VN-Index and the other variables in pairwise analysis? 1.3 Research methodology This research examines the co-movement between VN-Index and S&P 500 Index, VN-Index and gold prices, VN-Index and US Dollar - VN Dong exchange rates, VN-Index and crude oil prices by employing a number of econometric and financial modelling techniques To explore the short-run relationships among the variables, the techniques of correlations are utilized The technique of Granger causality is applied to test whether movements in one variable appear to lead those of another The technique of cointegration is employed to investigate the long-run relationships 1.4 Research structure The remainder of this study is structured as follows: Chapter reviews the literature 29 Level ADF/DF test statistic First difference ADF/DF test statistic Second sub-period (2/1/2008 – 31/12/2010) VN-INDEX 0.073989 -9.756758* SP500 -2.048295 -31.78474* USD/VND -0.276224 -30.52208* Gold price -0.363065 -27.13826* Oil price -1.290643 -30.14094* Notes: * indicates rejection of a unit root at the 1% level of significance Table 3b Unit root tests for the daily returns at level ADF test statistic Item Whole First sub- Second Third sub- Fourth period period sub-period period sub-period (1/4/2005 – (1/4/2005 – (1/2/2008 – (1/2/2009 – (1/4/2010 – 12/31/2010) 12/28/2007) 12/31/2008) 12/31/2009) 12/31/2010) RVN-Index -15.91723* -9.430241* -10.45040* -11.75886* -13.85041* RSP500 -32.28423* -33.37057* -14.42257* -17.72924* -16.27669* RUSD/VND -43.69989* -31.21590* -21.10427* -15.82464* -15.83753* RGold -38.08648* -26.68374* -15.16138* -16.20174* -15.86714* ROil -39.91862* -29.21438* -16.68888* -15.72851* -15.08062* Note: * indicates rejection of a unit root at the 1% level of significance 30 The table 3b above suggests that all the returns of VN-Index, S&P 500 Index, US Dollar - VN Dong exchange rate, gold and crude oil reject the null hypothesis of a unit root They are thus confirmed to be stationary In the following part, we proceed with the cointegration tests using the price of all products that are integrated of order one to uncover the long-term relationships among these time series 4.4 Cointegration test 4.4.1 Bivariate cointegration test Table represents the results for the trace and max-eigen statistics of the bivariate cointergration tests, that is, VN-Index with the price of the others In the table 4, the second column presents the ordered eigenvalues, the third column the trace test and the fourth the max-eigen test at the 0.05 level If the test statistic exceeds the critical value, the null hypothesis of no cointegrating vectors is rejected In general, to consider the whole period, all the tests indicate there is only one pair of VN-Index and oil price which are cointegrated at the 0.05 level However, when conducting the bivariate cointegration tests in every sub-period before and after Vietnam’s crisis, the results indicate that VN-Index and oil price are not cointegrated but the other pairs In the First sub-period (1/4/2005 – 12/28/2007), VN-Index and S&P 500 Index are cointegrated In the second sub-period, there are two cointegrating vectors between VN-Index and S&P 500 Index, one cointegrating vector between the pairs of VN-Index and US Dollar - VN Dong exchange rates, VN-Index and gold prices, VN-Index and crude oil prices 31 Table Bivariate cointegration test result Trace statistic 0.05 Group Name Eigenvalue Statistic Critical value Max-eigen statistic 0.05 Statistic Critical value Whole period (4/1/2005 – 31/12/2010) VN-Index & SP500 Index None At most VN-Index & USD/VND None At most VN-Index & Gold price None At most VN-Index & Oil price None At most 0.004066 0.000866 7.361222 1.290872 15.49471 3.841466 6.070350 1.290872 14.26460 3.841466 0.001524 0.000313 2.738604 0.466696 15.49471 3.841466 2.271908 0.466696 14.26460 3.841466 0.003434 0.000101 5.275919 0.150202 15.49471 3.841466 5.125717 0.150202 14.26460 3.841466 0.009667 0.001476 16.67407* 15.49471 2.200142 3.841466 14.47393* 2.200142 14.26460 3.841466 First sub-period (4/1/2005 – 28/12/2007) VN-Index & SP500 Index None At most VN-Index & USD/VND None At most VN-Index & Gold price None At most VN-Index & Oil price None At most 0.030403 0.000413 23.34019* 15.49471 0.307819 3.841466 23.03237* 0.307819 14.26460 3.841466 0.011847 0.002121 10.47432 1.583916 15.49471 3.841466 8.890407 1.583916 14.26460 3.841466 0.002359 0.000227 1.930859 0.169224 15.49471 3.841466 1.761634 0.169224 14.26460 3.841466 0.010998 0.001553 9.408914 1.159217 15.49471 3.841466 8.249697 1.159217 14.26460 3.841466 32 Trace statistic 0.05 Group Name Eigenvalue Statistic Critical value Max-eigen statistic 0.05 Statistic Critical value Second sub-period (2/1/2008 - 31/12/2010) VN-Index & SP500 Index None At most VN-Index & USD/VND None At most VN-Index & Gold price None At most VN-Index & Oil price None At most 0.027025 0.005897 24.78363* 15.49471 4.399994* 3.841466 20.38363* 4.399994* 14.26460 3.841466 0.034346 0.000524 26.39219* 15.49471 0.389593 3.841466 26.00260* 0.389593 14.26460 3.841466 0.033385 2.80E-05 25.28367* 15.49471 0.020809 3.841466 25.26287* 0.020809 14.26460 3.841466 0.028919 0.003611 24.52413* 15.49471 2.691394 3.841466 21.83274* 2.691394 14.26460 3.841466 Note: * denotes rejection of the hypothesis at the 0.05 level 4.4.2 Multivariate cointegration test The results for the λtrace and λmax statistics of the multivariate cointegration test are exhibited in Table Overall, the results show no cointegrating vector in the whole period There are two cointegrating equations in the first sub-period, one cointegrating equation in the second sub-period at the 0.05 level 33 Table Multivariate cointegration test result Hypothesized No of CE(s) Trace statistic 0.05 Max-eigen statistic 0.05 Eigenvalue Statistic Critical value Statistic Critical value Whole period (5/1/2005 – 31/12/2010) None 0.020838 65.61774 69.81889 31.37681 33.87687 At most 0.015798 34.24093 47.85613 23.72621 27.58434 At most 0.004177 10.51472 29.79707 6.236076 21.13162 At most 0.002189 4.278642 15.49471 3.265138 14.26460 At most 0.000680 1.013504 3.841466 1.013504 3.841466 First sub-period (5/1/2005 – 28/12/2007) None 0.058937 94.63081* 69.81889 45.31605* 33.87687 At most 0.036358 49.31475* 47.85613 27.62850* 27.58434 At most 0.020852 21.68625 29.79707 15.71987 21.13162 At most 0.005329 5.966383 15.49471 3.986323 14.26460 At most 0.002651 1.980059 3.841466 1.980059 3.841466 Second sub-period (2/1/2008 – 31/12/2010) None 0.061162 85.98960* 69.81889 46.95521* 33.87687 At most 0.024324 39.03438 47.85613 18.32061 27.58434 At most 0.020318 20.71377 29.79707 15.27206 21.13162 At most 0.007165 5.441708 15.49471 5.349679 14.26460 At most 0.000124 0.092029 3.841466 0.092029 3.841466 Note: * denotes rejection of the hypothesis at the 0.05 level 34 4.5 Granger causality test The Granger causality test is employed to further examine the causality relationship between VN-Index and S&P 500 Index, US Dollar - VN Dong exchange rate, the gold price, crude oil price The results of the Granger causality test between VN-Index and each product’s price are represented in Table In the whole period, only crude oil price affects VN-Index at the 0.05 level In the first sub-period (1/4/2005 – 7/28/2010), S&P 500 Index and VN-Index affect each other significantly at the 0.01 level Besides, US Dollar - VN Dong exchange rate also affects VN-Index at the 0.01 level and crude oil price affects VN-Index at the 0.05 level In the second sub-period, there is only one direction of Granger causality running from VN-Index to crude oil prices at the 0.01 level The fact that VN-Index impacts on S&P500 Index and crude oil prices can be explained by the existence of the another variable affecting crude oil prices and S&P 500 Index through VNIndex 35 Table Granger causality test result Null Hypothesis F-statistic First sub-period (4/1/2005 – 31/12/2010) (4/1/2005 – 28/12/2007) Second sub-period (2/1/2008 31/12/2010) VN-Index does not Granger Cause S&P 500 0.48518 9.10210** 0.19866 S&P 500 does not Granger Cause VN-Index 1.04893 10.1539** 0.32815 VN-Index does not Granger Cause USD/VND 0.93236 0.02137 1.04715 USD/VND does not Granger Cause VN-Index 0.20041 8.22734** 1.78912 VN-Index does not Granger Cause Gold price 0.20153 1.44975 0.33275 Gold price does not Granger Cause VN-Index 0.97192 0.00337 1.42186 VN-Index does not Granger Cause Oil price 1.82438 3.04353 4.80186** Oil price does not Granger Cause VN-Index 3.08231* 4.82355* 0.06973 Note: * denotes rejection of the hypothesis at the 0.05 level ** denotes rejection of the hypothesis at the 0.01 level 35 Whole period 36 CHAPTER 5: CONCLUSION This research investigates the impacts of the fluctuations in S&P 500 Index, US Dollar - VN Dong exchange rates, gold prices and crude oil prices on VN-Index by examining the interdependence among these variables over a considerable time span Firstly, the correlation test shows that the correlation between VN-Index and S&P 500 Index is very high before the Global Financial crisis 2008, reduces to be relatively high during and after the crisis In addition, the results of correlation test also indicate that VN-Index is highly correlated with gold prices and US Dollar VN Dong exchange rates in the first sub-period (1/4/2005 – 12/28/2007) Secondly, the empirical results of bivariate cointegration tests indicate a very low degree of integration between VN-Index and the others in the whole period (2005 – 2010), there is only one cointegrating equilibrium at 0.05 level between VN-Index and crude oil prices The results are consistent with Narayan and Narayan (2009)’s research using the daily data for the period 2000 – 2008 However, when analyzing each sub-period, the results show that there are no cointegrating vector between VN-Index and crude oil prices in the first sub-period and there is one cointegrating equilibrium at 0.05 level between VN-Index and crude oil prices in the second sub-period Moreover, there is one cointegrating equilibrium at 0.05 level between VN-Index and S&P 500 Index before the crisis and two cointegrating equilibriums at 0.05 level between VN-Index and S&P 500 Index during and after the crisis Furthermore, the analysis also shows that VN-Index is cointegrated with US Dollar - VN Dong exchange rates, gold prices during and after the crisis In addition, multivariate cointegration tests show two cointegrating equations at the 0.05 level in the first sub-period and one cointegrating equations at the 0.05 level in the second sub-period 37 Finally, bivariate Granger causality tests reveal causality running from crude oil prices to VN-Index in the whole period and in the first sub-period In addition, in the first-sub period, S&P 500 Index and the US Dollar - VN Dong exchange rates have a significant impact on VN-Index The above findings are meaningful for the governments’ decisions about the monetary and fiscal policy because the exchange rate in Vietnam is not determined by the market but mainly controlled by the government The empirical analysis results provide implications for investors who contemplate to invest in Vietnam’s stock market In short-term, people who invest in Vietnam’s stock market can get more reference information by monitoring the price movement of S&P 500 Index and US Dollar - 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Vietnam’s stock prices and the US’ stock prices, foreign exchange rates, gold prices, crude oil prices Using the daily data from 2005 to 2010, the results indicate that Vietnam’s stock prices are... EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY o0o - ĐỖ NGỌC ANH RELATIONSHIPS BETWEEN VIETNAM’S STOCK PRICES AND UNITED STATES’ STOCK PRICES, EXCHANGE RATES, GOLD PRICES, CRUDE