UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS A CAUSE AND EFFECT RELATIONSHIP BETWEEN FOREIGN INSTITUTIONAL INVESTMENT FLOWS AND STOCK MARKET RETURNS VIETNAM CASE STUDY By NGUYEN XUAN PHAP MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, August 2012 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS A CAUSE AND EFFECT RELATIONSHIP BETWEEN FOREIGN INSTITUTIONAL INVESTMENT FLOWS AND STOCK MARKET RETURNS VIETNAM CASE STUDY A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN XUAN PHAP Academic supervisor Dr DUONG NHU HUNG HO CHI MINH CITY, August 2012 CERTIFICATION “I certify that the substance of this thesis has not already been submitted for any degree and have not been currently submitted for any other degree I certify that to the best of my knowledge and help received in preparing this thesis and all sources used have been acknowledged in this thesis.” NGUYEN XUAN PHAP i ACKNOWLEDGMENTS I would like to thank all Professors at VNP, who have taught me initial economics lessons as well as guided me to further research later I specially express my deep gratitude to Professor Doctor Duong Nhu Hung, Lecturer at Shool of Industrial Management, University of Technology-Vietnam National University HCMC He has encouraged me to develop and complete this thesis from the initial proposal with wholehearted guidance, useful advice that enabled me to be patiently inquiring and more creative I owe so much my family and closed friends who gave me tremendous support in life and study Therefore, I take this chance to express my deep gratitude to them all Finally, I pride myself for working very hard to finish this thesis This seems fruit of my studying at VNP with many obstacles that I have overcome with determination and enthusiasm ii ABSTRACT Many previous studies has investigated the relationship between Foreign Institution Investment (FII) and stock market return in emerging markets of Asia such as Taiwan, Thailand, Korea, especially India with a lot of studies reseaching this relationship However, some of them investigated the relationship in mean, the other focused on volatility Wishing to have the combination research, with new approach in econometrics like VAR, multivariate GARCH, I carried out the investigation on this relationship that there has been no empirical study reseached in Vietnam market so far This thesis tried to investigate the relationship between FII and the stock market return in Vietnam represented by Ho Chi Minh Stock market (HOSE) in mean and volatility Data are used from year 2004-2011 including the two sub-periods of pre-crisis and during criris and found that FII caused the stock market return in all periods in mean; the stock market return caused FII only during crisis Regards to volatility, there was no long-term effect between the two series FII had short-term effect to the stock market return, especially during crisis iii ABBREVIATIONS AIC Akaike Information Criteria ARCH Autoregressive Conditional Heteroscedastic BEKK Multivariate model proposed by Baba, Engle, Kraft and Kroner BSE Bombay Security Exchange FII Foreign Institution Investment GARCH Generalized Autoregressive Conditional Heteroscedastic HNX Hanoi Stock Exchange HOSE Hochiminh Stock Exchange NSE National Stock Exchange of India SIC Schwartz Bayesian Information Criterion SMR Stock Market Return VAR Vector Auto Regression VN-Index Vietnam Ho Chi Minh Stock Index iv TABLE OF CONTENTS Chapter I : INTRODUCTION 1.1 Problem statement 1.2 Research objectives 1.3 Research scope 1.4 Research questions 1.5 Thesis structure Chapter II : LITERATURE REVIEW 2.1 Theory background 2.2 Empirical studies 2.3 Conceptual frame work 15 Chapter III : DATA SOURCE, RESEARCH METHODOLOGY AND HYPOTHESIS 16 3.1 Data source & variables 16 3.2 Methodology 17 3.2.1 Unit Root Test 18 3.2.2 Granger causality test 19 3.2.3 VAR BGARCH-BEKK (1,1) model 20 3.3 Hypotheses 25 Chapter IV : FINDINGS AND DISCUSSIONS 27 4.1 Data and descriptive statistics 27 4.2 Analysis results 32 4.3 Hypothesis testing and findings 41 Chapter V : CONCLUSIONS, POLICY IMPLICATIONS AND LIMITATIONS 44 5.1 Conclusions 44 v 5.2 Policy implications 44 5.3 Limitations 47 References 49 Appendix 53 vi LIST OF TABLES Table 2.1: Liturature review summary 11 Table 4.1: Descriptive statistics of FII flow and stock market return in three periods of time .28 Table 4.2: The results of unit root testing for FII and stock market return in periods considering intercept and trend in equation 33 Table 4.3: VAR Granger causality between FII and stock market return 35 Table 4.4: Bivariate GARCH(1,1)-BEKK model for FII and stock market return in HOSE 37 Table 4.5: Result of hypothesis testing .42 vii LIST OF FIGURES Figure 1.1 Deposited shares by years Figure 1.2: Percentage of deposited shares as proportion of registered shares per year Figure 1.3: Listing Scale 2011 Figure 1.4: VN-Index and Net trading volume of FII as proportion of the whole market of HOSE Figure 2.1: Causality between FII flows and stock market return 15 Figure 4.1a : The whole period graph with sub-period marks for monthly FII in HOSE 27 Figure 4.1b : The whole period graph with sub-period marks for monthly stock market return in HOSE 28 Figure 4.2a : The whole period graph with sub-period marks of monthly FII in HOSE varied by season .31 Figure 4.2b : The whole period graph with sub-period marks of monthly stock market return in HOSE varied by season 32 viii Table C.8: Vector Autoregression Estimates VAR(5,5) Vector Autoregression Estimates Date: 08/16/12 Time: 15:52 Sample (adjusted): 2008M09 2011M12 Included observations: 40 after adjustments Standard errors in ( ) & t-statistics in [ ] FII_SA3 RETURN_SA3 FII_SA3(-1) 0.175270 (0.21708) [ 0.80741] -0.417141 (0.31895) [-1.30786] FII_SA3(-2) 0.218197 (0.17828) [ 1.22389] 0.174080 (0.26195) [ 0.66455] FII_SA3(-3) -0.194285 (0.17495) [-1.11050] 0.037896 (0.25706) [ 0.14742] FII_SA3(-4) 0.201381 (0.16627) [ 1.21120] -0.275481 (0.24429) [-1.12766] FII_SA3(-5) 0.065047 (0.16590) [ 0.39209] -0.433001 (0.24375) [-1.77639] FII_SA3(-6) -0.157754 (0.17112) [-0.92191] -0.088489 (0.25142) [-0.35196] FII_SA3(-7) -0.106154 (0.15854) [-0.66959] -0.312183 (0.23294) [-1.34020] FII_SA3(-8) 0.109723 (0.16210) [ 0.67687] -0.302563 (0.23818) [-1.27032] RETURN_SA3(-1) 0.098968 (0.13763) [ 0.71908] -0.068843 (0.20222) [-0.34044] RETURN_SA3(-2) -0.073936 (0.12500) [-0.59149] -0.021657 (0.18366) [-0.11792] RETURN_SA3(-3) -0.096431 (0.11535) [-0.83597] -0.231182 (0.16949) [-1.36401] 73 RETURN_SA3(-4) 0.199810 (0.11188) [ 1.78593] 0.053350 (0.16439) [ 0.32454] RETURN_SA3(-5) 0.001382 (0.10757) [ 0.01285] 0.214007 (0.15805) [ 1.35404] RETURN_SA3(-6) -0.081579 (0.10293) [-0.79256] -0.247709 (0.15124) [-1.63790] RETURN_SA3(-7) 0.421896 (0.10671) [ 3.95359] -0.158312 (0.15679) [-1.00969] RETURN_SA3(-8) -0.131624 (0.12834) [-1.02555] -0.041525 (0.18858) [-0.22020] C 1.660920 (1.50400) [ 1.10434] 6.268905 (2.20983) [ 2.83682] 0.564086 0.260841 576.3071 5.005680 1.860168 -110.1128 6.355638 7.073412 2.140018 5.822295 0.617126 0.350778 1244.161 7.354860 2.316994 -125.5043 7.125214 7.842988 -0.365975 9.128046 R-squared Adj R-squared Sum sq resids S.E equation F-statistic Log likelihood Akaike AIC Schwarz SC Mean dependent S.D dependent Determinant resid covariance (dof adj.) Determinant resid covariance Log likelihood Akaike information criterion Schwarz criterion 1205.276 398.4945 -233.2690 13.36345 14.79900 74 VAR(1,1) Vector Autoregression Estimates Date: 10/07/12 Time: 16:47 Sample (adjusted): 2008M02 2011M12 Included observations: 47 after adjustments Standard errors in ( ) & t-statistics in [ ] FII_SA3 RETURN_SA3 FII_SA3(-1) 0.492656 (0.13039) [ 3.77842] -0.184973 (0.17785) [-1.04006] RETURN_SA3(-1) -0.165621 (0.10088) [-1.64176] 0.368113 (0.13760) [ 2.67520] C 1.705617 (1.15577) [ 1.47574] 0.044169 (1.57649) [ 0.02802] 0.292078 0.259900 2113.988 6.931463 9.076879 -156.1354 6.771721 6.889815 4.017837 8.057118 0.166241 0.128343 3933.147 9.454613 4.386517 -170.7257 7.392584 7.510679 -1.214678 10.12677 R-squared Adj R-squared Sum sq resids S.E equation F-statistic Log likelihood Akaike AIC Schwarz SC Mean dependent S.D dependent Determinant resid covariance (dof adj.) Determinant resid covariance Log likelihood Akaike information criterion Schwarz criterion 4227.631 3705.158 -326.4910 14.14855 14.38474 75 Table C.9: VAR Granger Causality/Block Exogeneity Wald Tests VAR Granger Causality/Block Exogeneity Wald Tests Date: 08/16/12 Time: 15:53 Sample: 2008M01 2011M12 Included observations: 40 Dependent variable: FII_SA3 Excluded Chi-sq df Prob RETURN_SA3 18.74865 0.0163 All 18.74865 0.0163 Dependent variable: RETURN_SA3 Excluded Chi-sq df Prob FII_SA3 26.94867 0.0007 All 26.94867 0.0007 76 Appendix D : Ljung-Box/Correlogram test Table D.1: Correlogram test for standardized residuals period of 2004-2011 Standardized Residual Date: 08/29/12 Time: 16:27 Sample: 2004M01 2011M12 Included observations: 94 Autocorrelation | |* | |* |* | |* | |* |* | | | | | | | | | | Partial Correlation | |* | |* |* | |* | |* |* | | | | | | | | | | AC PAC -0.025 -0.025 0.095 0.095 -0.062 -0.059 0.084 0.074 0.081 0.096 0.068 0.055 0.119 0.119 0.029 0.031 0.120 0.101 10 0.118 0.127 Q-Stat 0.0583 0.9500 1.3366 2.0503 2.7106 3.1910 4.6592 4.7502 6.2748 7.7777 Prob 0.809 0.622 0.720 0.727 0.744 0.785 0.701 0.784 0.712 0.651 Standardized Residual Date: 08/29/12 Time: 16:28 Sample: 2004M01 2011M12 Included observations: 94 Autocorrelation | | .*| | | | | | |** | | | | | | | | | | | Partial Correlation | | .*| | | .*| | | |** | | | | | | | | | | | AC PAC 0.016 0.016 0.001 0.001 -0.163 -0.163 0.040 0.046 0.020 0.020 -0.042 -0.072 -0.036 -0.021 0.008 0.016 0.299 0.288 10 0.045 0.031 77 Q-Stat 0.0235 0.0236 2.6499 2.8069 2.8492 3.0337 3.1699 3.1771 12.651 12.869 Prob 0.878 0.988 0.449 0.591 0.723 0.805 0.869 0.923 0.179 0.231 Table D.2: Correlogram test for squared standardized residuals in period of 2004-2007 Squared Standardized Residual Date: 08/29/12 Time: 16:29 Sample: 2004M01 2011M12 Included observations: 94 Autocorrelation | | | | .*| | | | | .*| | | | | | | | | | | Partial Correlation | | | | .*| | | .*| | .*| | | | | | | | | | | 10 AC PAC 0.001 -0.059 -0.057 0.061 -0.103 0.028 -0.007 -0.063 -0.020 -0.097 0.001 -0.059 -0.057 0.057 -0.111 0.033 -0.014 -0.077 -0.004 -0.125 AC PAC Q-Stat 7.E-05 0.3455 0.6696 1.0391 2.1139 2.1925 2.1983 2.6163 2.6601 3.6629 Prob 0.993 0.841 0.880 0.904 0.833 0.901 0.948 0.956 0.976 0.961 Squared Standardized Residual Date: 08/29/12 Time: 16:30 Sample: 2004M01 2011M12 Included observations: 94 Autocorrelation |* | .*| | |* |* *| |* |* |* | | | | | | | | | | Partial Correlation |* | .*| | |* |* *| |* |* | | | | | | | | | | | 0.087 0.087 0.047 0.040 -0.072 -0.080 0.003 0.014 0.091 0.098 0.115 0.094 -0.091 -0.121 0.108 0.134 0.129 0.144 10 0.087 0.025 78 Q-Stat 0.7267 0.9469 1.4572 1.4583 2.2998 3.6550 4.5230 5.7368 7.4933 8.2988 Prob 0.394 0.623 0.692 0.834 0.806 0.723 0.718 0.677 0.586 0.600 Table D.3: Correlogram test for standardized residuals period of 2004-2007 Standardized Residual Date: 08/29/12 Time: 16:19 Sample: 2004M01 2007M12 Included observations: 46 Autocorrelation | .| .*| | |* |* .*| *| |* .| | | | | | | | | | | Partial Correlation | .| .*| | |* .| .*| *| |* .*| | | | | | | | | | | 10 AC PAC -0.002 -0.048 -0.194 -0.007 0.121 0.087 -0.116 -0.136 0.098 -0.021 -0.002 -0.048 -0.195 -0.012 0.107 0.054 -0.115 -0.098 0.126 -0.081 AC PAC 0.119 -0.015 -0.318 0.003 0.079 -0.002 -0.017 0.020 0.337 0.049 0.119 -0.029 -0.317 0.086 0.075 -0.143 0.029 0.089 0.317 -0.057 Q-Stat 0.0002 0.1148 2.0522 2.0547 2.8456 3.2614 4.0274 5.0959 5.6649 5.6923 Prob 0.989 0.944 0.562 0.726 0.724 0.775 0.777 0.747 0.773 0.840 Standardized Residual Date: 08/29/12 Time: 16:20 Sample: 2004M01 2007M12 Included observations: 46 Autocorrelation |* .| **| | |* .| .| .| |** | | | | | | | | | | | Partial Correlation |* .| **| |* |* .*| | |* |** | | | | | | | | | | | 10 79 Q-Stat 0.6942 0.7052 5.8964 5.8968 6.2317 6.2320 6.2490 6.2716 13.064 13.211 Prob 0.405 0.703 0.117 0.207 0.284 0.398 0.511 0.617 0.160 0.212 Table D.4: Correlogram test for squared standardized residuals in period of 2004-2007 Squared Standardized Residual Date: 08/29/12 Time: 16:20 Sample: 2004M01 2007M12 Included observations: 46 Autocorrelation *| | *| | *| | |* | *| | | | | | |* | *| | *| | Partial Correlation *| | *| | *| | |* | *| | | | | | | | *| | *| | 10 AC PAC -0.079 -0.078 -0.091 0.161 -0.131 -0.022 -0.045 0.107 -0.139 -0.071 -0.079 -0.084 -0.105 0.140 -0.127 -0.026 -0.045 0.055 -0.111 -0.097 AC PAC Q-Stat 0.3090 0.6107 1.0321 2.3880 3.3140 3.3401 3.4558 4.1196 5.2800 5.5870 Prob 0.578 0.737 0.793 0.665 0.652 0.765 0.840 0.846 0.809 0.849 Squared Standardized Residual Date: 08/29/12 Time: 16:21 Sample: 2004M01 2007M12 Included observations: 46 Autocorrelation | .| .*| |* .| .| .*| *| | |* | | | | | | | | | | Partial Correlation | .| .*| |* .| .| .*| *| | |* | | | | | | | | | | 0.056 0.056 0.035 0.032 -0.095 -0.099 0.083 0.094 0.038 0.035 0.050 0.030 -0.173 -0.167 -0.094 -0.080 0.039 0.068 10 0.189 0.161 80 Q-Stat 0.1523 0.2123 0.6788 1.0400 1.1191 1.2573 2.9479 3.4623 3.5534 5.7436 Prob 0.696 0.899 0.878 0.904 0.952 0.974 0.890 0.902 0.938 0.836 Table D.5: Correlogram test for standardized residuals in period of 2008-2011 Squared Standardized Residual Date: 08/29/12 Time: 16:22 Sample: 2008M01 2011M12 Included observations: 46 Autocorrelation *| |* .| |* .| .| .| .| .*| | | | | | | | | | | | Partial Correlation *| |* .| |* .| .| .| .| .*| | | | | | | | | | | | 10 AC PAC -0.118 0.174 -0.055 0.144 0.002 0.026 -0.016 0.026 -0.101 -0.010 -0.118 0.162 -0.020 0.113 0.040 -0.012 -0.014 0.007 -0.105 -0.040 AC PAC -0.023 0.021 -0.226 -0.094 0.031 -0.158 -0.042 -0.062 0.347 0.080 -0.023 0.020 -0.225 -0.109 0.035 -0.217 -0.114 -0.068 0.289 0.040 Q-Stat 0.6881 2.2071 2.3646 3.4573 3.4575 3.4941 3.5093 3.5496 4.1548 4.1614 Prob 0.407 0.332 0.500 0.484 0.630 0.745 0.834 0.895 0.901 0.940 Squared Standardized Residual Date: 08/29/12 Time: 16:23 Sample: 2008M01 2011M12 Included observations: 46 Autocorrelation | .| **| *| | .*| | .| |** |* | | | | | | | | | | Partial Correlation | .| **| *| | **| *| *| |** | | | | | | | | | | | 10 81 Q-Stat 0.0271 0.0482 2.6609 3.1255 3.1784 4.5555 4.6542 4.8797 12.062 12.454 Prob 0.869 0.976 0.447 0.537 0.673 0.602 0.702 0.770 0.210 0.256 Table D.6: Correlogram test for squared standardized residuals in period of 2008-2011 Squared Standardized Residual Date: 08/29/12 Time: 16:23 Sample: 2008M01 2011M12 Included observations: 46 Autocorrelation | .| .| .| .| .*| | .| .| .| | | | | | | | | | | Partial Correlation | .| .| .*| | .*| | .*| *| | | | | | | | | | | | 10 AC PAC 0.010 -0.064 -0.058 -0.065 -0.020 -0.108 0.025 -0.048 -0.065 0.015 0.010 -0.064 -0.057 -0.069 -0.027 -0.122 0.014 -0.074 -0.082 -0.010 AC PAC -0.028 0.218 -0.034 -0.156 -0.129 0.184 -0.079 0.196 0.009 -0.031 -0.028 0.217 -0.024 -0.215 -0.136 0.294 -0.012 0.028 -0.010 -0.020 Q-Stat 0.0051 0.2109 0.3850 0.6087 0.6309 1.2745 1.3090 1.4429 1.6922 1.7051 Prob 0.943 0.900 0.943 0.962 0.987 0.973 0.988 0.994 0.995 0.998 Squared Standardized Residual Date: 08/29/12 Time: 16:24 Sample: 2008M01 2011M12 Included observations: 46 Autocorrelation | |** | .*| *| |* .*| |* .| .| | | | | | | | | | | Partial Correlation | |** | **| *| |** | .| .| .| | | | | | | | | | | 10 82 Q-Stat 0.0385 2.4192 2.4776 3.7613 4.6548 6.5273 6.8793 9.1227 9.1277 9.1871 Prob 0.844 0.298 0.479 0.439 0.459 0.367 0.442 0.332 0.426 0.514 Appendix E: Bivariate Garch model estimation from R-Plus Multivariate Garch for FII and stock market return in period 2004-2011: R version 2.14.0 (2011-10-31) Copyright (C) 2011 The R Foundation for Statistical Computing ISBN 3-900051-07-0 Platform: i386-pc-mingw32/i386 (32-bit) R is free software and comes with ABSOLUTELY NO WARRANTY You are welcome to redistribute it under certain conditions Type 'license()' or 'licence()' for distribution details Natural language support but running in an English locale R is a collaborative project with many contributors Type 'contributors()' for more information and 'citation()' on how to cite R or R packages in publications Type 'demo()' for some demos, 'help()' for on-line help, or 'help.start()' for an HTML browser interface to help Type 'q()' to quit R [Previously saved workspace restored] > setwd("c:/users/admin/desktop/data") > library(mgarch) Loading required package: tseries Loading required package: quadprog Loading required package: zoo Attaching package: ‘zoo’ The following object(s) are masked from ‘package:base’: as.Date, as.Date.numeric ‘tseries’ version: 0.10-27 ‘tseries’ is a package for time series analysis and computational finance See ‘library(help="tseries")’ for details Loading required package: mvtnorm 83 Warning messages: 1: package ‘tseries’ was built under R version 2.14.1 2: package ‘zoo’ was built under R version 2.14.1 > residvarsa3 attach(residvarsa3) > group3 test3 out3