DANANG UNIVERSITY OF ECONOMIC

Macroeconomic Factors and Stock

Market Movement

Teacher: Dinh Bao Ngoc

Class: 41k15.1 CLC
Group: Tran Nhat Sam
Huynh Dan Thanh
Bui Bach Dang
Tran Cong Bao Toan
 Đà Nẵng, ngày tháng năm

• Introduction

Nowadays, according to the common trend of the world, besides the main income
of jobs or the own production and business, the Vietnamese also have additional
income from the sources such as making deposits in the banks, investing in foreign
currency, trading in gold, investing in business of real estate and stocks. Investing
in the stock market brings the high profitability but a lot of risks. This investment
currently has the best transparence in Vietnam, and enough liquidity to get the
difference of business in short term as well as to choose the good and stable codes
for the long-term investment in difficult stages. Based on the advantages above, the
stock investment becomes more and more popular and plays a very important role
in the financial system of country. Since then, most investors of stock care that if
the estimation tools are used to forecast the trend of stock prices.

The relationship between macroeconomic factors and stock market development

has dominated in the academic and practitioners’ literature over the past decades.
Some fundamental macroeconomic variables such as exchange rate, interest rate,
industrial production and inflation have been argued to be the determinants of stock
prices. It is believed that government financial policies and macroeconomic events
have large influence on general economic activities including the stock market.
This has motivated many researchers to investigate the dynamic relationship
between stock returns and macroeconomic variables.

In summary, in the developing economy and a quite new stock market of

Vietnam, macroeconomic factors which are market price index, consumer price
index, money supply and exchange rate has a powerful and immediate (nearly
immediate reflection to the international information) impact (both positively and
negatively) on the fluctuation of share price in the stock market. Therefore, it is
 essential to implement the research “Impact of macroeconomic factors on share
price index in Vietnam’sstock market”so as to find the mutual impact of
investment forms and evaluate changes in behavior of investors in the stock
market. This topic is different from the previous ones which foreign currency and
stock are considered the interchangeable channels of investment, so it is expected
that this topic will find the correlation between exchange rate and stock price index
generally and share price index specifically. Thence, managers can have the
appropriate macroeconomic policies and investors will make more reasonable
decisions in business of share at the current economy.

In spite of the increasing migration of capital from developed to emerging

economies and its associated high returns, emerging stock markets have not been
well explored.Over the past years, macroeconomic activity in Vietnam has seen a
tremendous improvement as the Bank of Vietnam continues its mandate of
maintaining price stability, a strong and stable exchange rate, a low inflation rate,
and low interest rates.

The growing interest in the performance of emerging markets has been

attributed to the conduct of sound macroeconomic policies, privatisation, stock
market reform and financial liberalization in recent years.

The objective of the present study is to contribute to the existing literature by

examining the effects of macroeconomic variables on the movement of Vietnam
stock market HaNoi Stock exchange (HNX). Our results indicate that stock prices in
Vietnam is consistently influenced by changes in macroeconomic variables
consistent with the findings of studies in developed .

• Data and Methodology

• Data Selection Justification and Hypothesis

In this section we justify the selection of the variables used for the analysis in
this study.

Hanoi Stock Index: This variable which serves as the dependent variable in
our analysis captures the performance of the market and it is the dependent
variable in our regression analysis.

Inflation: High rates of inflation increase the cost of living and a shift of
resources from investments to consumption. This leads to a fall in the demand
for market instruments and subsequently leads to a reduction in the volume of
stock traded. Also the monetary policy responds to the increase in the rate of
inflation with economic tightening policies, which in turn increases the
nominal risk-free rate and hence raises the discount rate in the valuation
model.

Exchange rate: Exchange rate helps adjust and balance supply and demand of
assets. Investors will sell some foreign assets which currently make them less
interesting, if they want to purchase more domestic assets. This leads the high
valuation of domestic currency or decreased exchange rate (because exchange
rate is determined as price of a currency unit calculated based on price of
other currency – domestic), so relation between stock price and exchange rate
is in the opposite direction. Increased price of domestic assets makes investors
raise their need about currency, and this leads to the increase of interest rate.
Other operation making relation between stock price and exchange rate be in
the opposite direction is more foreign investment in domestic assets which
making stock price increased. This is also the cause of high valuation of
domestic currency.
 Interest rate: The relationship between interest rates and stock prices is well
established. An increase in interest rate will increase the opportunity cost of
holding money and investors substitute holding interest bearing securities for
share hence falling stock prices. The Treasury bill rate is used as a measure of
interest rate in this study because investing in Treasury bill is seen as
opportunity cost for holding shares. High-treasury bill rates encourage
investors to purchase more government instruments. Treasury bills thus tend
to compete with stocks and bonds for the resources of investors. The expected
relationship between stock prices and Treasury bill rates is thus negative.

Net Foreign Direct Investment: Foreign Direct Investment (FDI) flows

record the value of cross-border transactions related to direct investment
during a given period of time, usually a quarter or a year. Financial flows
consist of equity transactions, reinvestment of earnings, and intercompany
debt transactions. Outward flows represent transactions that increase the
investment that investors in the reporting economy have in enterprises in a
foreign economy, such as through purchases of equity or reinvestment of
earnings, less any transactions that decrease the investment that investors in
the reporting economy have in enterprises in a foreign economy, such as sales
of equity or borrowing by the resident investor from the foreign enterprise.
Inward flows represent transactions that increase the investment that foreign
investors have in enterprises resident in the reporting economy less
transactions that decrease the investment of foreign investors in resident
enterprises. FDI flows are measured in USD and as a share of GDP. FDI
creates stable and long-lasting links between economies.

• Research objectives
 - Reviews the situation of fluctuation of interest rates, exchange rates,
inflation and the stock market

- Studying the effects of short- and long-term factors, interest rates,

exchange rates of exchange and inflation on the stock price on the stock
market

• Method of data collection

Secondary data collected from the source which begins 01/2006 to 12/2015 is
manifested in the following table:

Variable Description Unit Source of collection

HNX Point Hanoi Stock

Exchange

Interest rate In Vietnam, % Trading economic

Interest rates
decisions are
taken by The State
Bank of Vietnam.
The official
interest rate is the
Refinancing Rate

Exchange rate An interbank VND/USD Trading economic

exchange rate
 (monthly average)
of Vietnam dong
(VND) to the
United States
dollar (USD)

FDI Foreign Direct % Trading economic

Investment (FDI)
stocks measure
the total level of
direct investment
at a given point in
time, usually the
end of a quarter or
of a year.

Inflation Inflation affects % Trading economic

economies in
different positive
and negative ways

• Method of data analysis

Researching the impact of monthly average index of market price in

HNX , monthly consumer price index (FDI), an interbank exchange rate
(monthly average) of Vietnam dong (VND) to the United States dollar (USD)
(EX), interest rate, Inflation, implemented by using stata software will help
determine macroeconomic factors really making impact on dependent
variables and level of effect. This method will eliminate inappropriate
variables and limit unnecessary variables in the model so that result of
estimation is exact. One of hypotheses of classical linear regression model is
that independent variables must be non-random variables. If we estimate a
model with chronological series in which independent variables are non-
stationarity, hypotheses of ordinary least square will be violated which makes
t and p test inefficient.

This is considered as the initial step used in the model. If chronological

sequence does not contain unit root or is called stationarity, chosen variables
can meet the requirement of used method. In contrast, if result of unit root test
shows variables which are non-stationarity sequence, integration test is
implemented because the linear combination of non-stationarity chronological
sequence can be a stationarity sequence and those non-stationarity
chronological sequences are considered cointegration.

After determining that data is stationarity sequences, it is necessary to

use regression model to define impact of share price index on dependent
variables, impact of market price index, consumer price index, exchange rate
and money supply on independent variables and impact of independent
variables on explanatory variables.

Relation between independent variables and dependent variables is

manifested on the following equation: