Macroeconomic indicators and stock market returns in emerging economies: The case of Vietnam

Abstract

The prime contribution of this research is that it provides various empirical results regarding the bivariate and multivariate causality and cointegrating relationships between Vietnam’s stock market returns and macroeconomic variables, specifically those pertaining to economic growth (GDP), consumer price index (CPI), broad money supply (M2), interest rates (IR – including deposit rate DR, lending rate LR, and refinancing rate FR), foreign exchange rate USD/VND (EX), and foreign direct investment (FDI). The robustness of Vector Autoregressive (VAR) and Generalized Autoregressive Conditional Heteroskedasticity (GARCH) frameworks were tested for Vietnam, which is a new emerging market. Using an updated data set of 161 monthly observations collected for the period from August 2000 to December 2013, a unique equation that represents the linkage among variables of interest was established. Particularly, a wide range of techniques, including unit root tests, Johansen cointegration tests, Granger causality tests, dynamic analysis (impulse response function and variance decomposition) were employed, which demonstrated that the VN-Index corresponds to long run, and also short run, path of selected macroeconomic variables. Furthermore, taking the volatility clustering into account, GARCH (1,1) models reveal the predictability of stock market volatilities using previous shocks (i.e. those originating from GDP, CPI and EX) rather than the previous volatility itself. The discussion of empirical findings has additionally been substantiated and corroborated via a field questionnaire, which gathered views of experts who are directly or indirectly involved with Vietnam’s stock market. The empirical results, along with the outcome of the empirical survey, provide the basis for policy and investment implications, emphasizing that using macroeconomic indicators would be beneficial to policy-makers, as well as securities investors, in promoting the development of Vietnam’s stock market. The addition of external shocks (i.e. global crash 2007-2008) and/or other portfolios of stocks (VN30-Index, HNX-Index, HNX30-Index, UPCoM-Index) could be considered in further research.