MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM
BANKING UNIVERSITY HO CHI MINH CITY
DANG THI QUYNH ANH
THE IMPACT OF MONETARY POLICY ON VIETNAMESE
STOCK MARKET
SUMMARY OF PHD THESIS
MAJOR: FINANCE – BANKING
CODE: 62.34.02.01
SUPERVISORS:
ASS. PROF. DO LINH HIEP
ASS. PROF. HA THI THIEU DAO
Hochiminh City, 2018
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Summary
The stock market is a channel for mobilizing medium to long-term capital for the
economy and is an investment channel which attracts the attention of the authorities,
domestic and foreign investors. Vietnam’s stock market has experienced over 16 years
of establishment and development. There were periods when the stock market grew
too fast (especially in the period of 2006 - 2007), only totake the plunge in 2008-2009,
which affected investors, securities companies and financial services providers. The
volatility of the stock market is subject to many factors among which are the
macroeconomic factors, especially the central bank's monetary policy which plays an
important role.
This dissertation was conducted to study the impact of monetary policy on the stock
market during the period 2002 – 2016 using monthly time data collected from reliable
sources. Specifically: (i) study the impact of monetary policy (money supply,
interbank interest rate) on the stock market in Vietnam (measured by VN-Index); (ii)
study the impact of monetary policy (money supply, interbank interest rate) on
Vietnam’s stock market liquidity (measured by 4 characteristics). The regression
models used are the SVAR and VAR models based on the Eviews 8.0 software, and
the research results show that:
(1) During the study period, the relaxing (tightening) of monetary policy by the SBV
had the effect of increasing (decreasing) stock price immediately after 2 months and
lasting up to 6 months later. The variance decomposition shows that from January
2002 to December 2007, the impact of monetary policy on the stock market was not as
strong as in the period from January 2008 to December 2016.
(2) In addition, when SBV relaxes (tighten) the monetary policy by increasing
(decreasing) the money supply, the liquidity of Vietnam stock market increases
(decreases). The results of variance decomposition show that the money supply and
interbank rates explain 8% - 10% of volatility of liquidity (or illiquidity) after a period
of 9-12 months . The remaining variables explain 6% - 9% volatility of liquidity
variables in shorter windows (only 3 months).
(3) Indicating the impact of monetary policy on stock prices: when SBV increases the
total means of payment (or money supply), this reduces the mobilizing interest rate of
commercial banks, making investment in securities more appealing and shooting up
the demand for shares. In addition, falling interest rates also reduces the cost of
borrowing from businesses, thereby stimulating businesses to increase investment,
expanding production and profit is expected to increase and so do stock prices.
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CHAPTER 1:INTRODUCTION
1.1. Research topic
Nowadays, most individuals are directly or indirectly involved in the stock market. In
deciding which stocks to buy or sell, investors need to estimate the expected rate of
returns as well as the risk in investing in each stock. Meanwhile, companies that raise
capital from the sale of shares to the public need to decide what price to sell at and
how many stocks to sell. Policymakers need to understand the mechanism of the
impact of changes in monetary policy management to the stock market, thereby
accommodating the objective of stabilizing the stock market with their existing
objectives. Research by Bernanke and Gertler (2000) suggests that policymakers
should maintain the stability of commodity prices in the economy to avoid impacting
stock prices significantly.
In order to find out which major factors have impact on the Vietnam’s stock market,
there are a number of research topics carried out in different periods with different
approaches. The studies of Nguyen Son (2003), Dang Van Hai (2007), Hoang Xuan
Que (2007), Tran Trong Triet (2008), Nguyen Thi Mui (2009), Le Hoang Nga (2009),
Tran Hoang Ngan, 2009), VAFI (2012), Doan Ngoc Hoan (2013) ... have shown that
short-term macro factors have certain impacts on the stock market. In addition, longer-
term quantitative studies also show that macro variables such as inflation, exchange
rates, money supply, interest rates and industrial output have important impacton stock
prices, rate of return or liquidity of markets (Tran Thi Xuan Anh and Ngo Thi Hang
(2012), Phan Dinh Nguyen and Ha Minh Phuoc (2012), Phan Thi Bich Nguyet and
Pham Duong Phuong Thao (2013), Nguyen Huu Huy Nhat (2013), Than Thi Thu
Thuy and Vo Thi Thuy Duong (2014), Tran Thi Hai Ly (2015), Le Dat Chi (2015) ...).
At present, the Vietnam’s stock market has developed vigorously with remarkable
growth and is considered one of the top five markets in the world as stock prices have
returned to the peak achieved in 2007. However, there is no research on whether such
development is stable and affected by macroeconomic factors, especially from the
management of monetary policy of the State Bank of Vietnam has impact on the
market development. The thesis entitled "The Impact of Monetary Policy on the
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Stock Market" was conducted to clarify this issue, helping policymakers and investors
to unfold the impact of monetary policy on the price and liquidity of the stock market,
thus devising appropriate operational policies and investment strategies.
1.2 Overview of the literature (domestic and international studies)
Research on the impact of monetary policy on the stock market has been carried out
since the 1970s (Rozeff, 1974; Pesando, 1974; Auerbach, 1976). The studies on the
impact of monetary policy on the stock market across countries in the world have been
conducted with different approaches.
The first approach is to study the impact of monetary policy on the stock market, which
considers the role of the stock market as a channel to convey the influence of the
monetary policy on the economy. Mishkin (2001), Cosimano et al. (1999), Ehrmann and
Fratzscher (2004), Berument and Kutan (2007) are typical studies of this type.
The second approach is to study the reaction of stock prices to the announcement of the
change in operating interest rates or money supply. Under this approach, researchers
often use event study methodology with high frequency (day or week) data to gauge the
immediate impact of monetary policy announcementson the stock market price.
A third approach is to use a regression model using monthly or quarterly data to assess
the short- and long-term effects of monetary policy – related variables on stock prices
(or returns ) and liquidity of the stock market. The results of previous studies in the
1990s (Pesando, 1974; Rozeff, 1974; Rogalski and Vinso, 1977; Darrat, 1990) show
that changes in monetary policy (money supply or interest rates) do not Granger cause
the changes in share price (or return). This approach is also widely adopted in the
context of emerging markets such as Tang et al. (2013) in China, Abaenewe and
Ndugbu (2012) in Nigeria, Seong (2013) in Singapore, Yoshino et al. (2014) in South
East Asian countries ... Most of the findings show that the shocks to monetary policy
affect the stock price or the rate of return in the stock market: The tightening effect of
monetary policy on stock prices is negative and vice versa.
Domestic studies have been conducted mainly using the third approach, such as
Nguyen Huu Tuan (2011), Phan Dinh Nguyen and Tang Trang Chau (2013), Nguyen
Minh Kieu and Nguyen Van Diep (2013), Phan Thi Bich Nguyet and Pham Duong
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Phuong (2013), Bui Kim Yen and Nguyen Thai Son (2014), Duong Ngoc Mai Phuong
and Vu Thi Phuong Anh (2015), Than Thi Thu Thuy (2015). However, in general
these studies only assess the impact of macro factors on the stock market without
examining the impact of monetary policy on stock prices and liquidity of the market.
1.3 Objectives and research questions
a. Research objectives
+ Determine the direction of the impact of monetary policy on share price and
liquidity of Vietnam’s stock market.
+ Determine the impact of monetary policy - related factors on stock prices and
liquidity of the Vietnam’s stock market.
+ Clarify the mechanism of impact of monetary policy to share price and liquidity
of Vietnam’s stock market
+ Make recommendations for policymakers to support the development of the stock
market and for investors to increase profits, reduce risks.
b. Research questions
+ Does the monetary policy affect stock prices in Vietnam stock market? If so, what
is the direction and magnitude of the impact of monetary policy factors on the
stock market in Vietnam?
+ Does the monetary policy affect the liquidity of the Vietnamese stock market? If
so, how are the trends and magnitude of the impact of monetary policy factors on
market liquidity?
+ What is the impact of monetary policy on stock prices and liquidity of the stock
market?
+ What are the recommendations for policymakers to support the development of
the stock market?
1.4 Object and scope of the study
Research objectives: The impact of monetary policy on Vietnam stock market with
regard to two aspects which are stock price and market liquidity.