Analysis of the impact of exchange rate and interest rate on stock return in vietnam stock market

Hong Duc University Journal of Science, E.4, Vol.9, P (54 - 60), 2017 
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ANALYSIS OF THE IMPACT OF EXCHANGE RATE AND INTEREST 
RATE ON STOCK RETURN IN VIETNAM STOCK MARKET 
Nguyen Thi Thanh Hai, Dinh Thi Thu Thuy1 
Received: 27 April 2016 / Accepted: 10 October 2017 / Published: November 2017 
©Hong Duc University (HDU) and Hong Duc University Journal of Science 
Abstract: By using the multiple regression models we find out the impact of exchange rate 
and interest rate on stock return of 3 companies which present for 3 difference lines: 
technology - FPT Joint Stock Company (FPT), Construction trades Kinh Bac City 
Development Share Holding Corporation (KBC) and food industry - Viet Nam Dairy Products 
Joint Stock Company (VNM). 
Keywords: Exchange rate, interest rate, stock return, Vietnam stock market. 
1. Introduction 
Firstly being introduced since 1988, Vietnam stock market has experienced many 
periods of fluctuations. From 1988 until now, it has witnessed two important milestones of 
great significance. In spite of the fact that banking sector has dominated Vietnam economy 
market from then on, the stock market has still taken an important role. This was explained by 
the effect of stock market: once the stock market volatiles, it would entail a series of 
continuous consequences. Moreover, the emerging markets, including Vietnam, have been 
invested by the foreign cash flows since liberalization and globalization became popular. 
However, Vietnam stock market has still had to face with many risks such as poor 
infrastructure, loose legal framework and status of asymmetric information. This is a major 
concern for investors as well as Vietnam's economy. Therefore, it is important for economic 
entities participating in the Vietnam stock market to understand the principles of operation of 
the stock market, the factors affecting the stock market and the impact level of them. 
The relationship between the stock price and financial variables has been the subject of 
numerous studies so far. However, they are often carried out in market, where the stock 
markets have been well-developed. Moreover, the studies of emerging markets like Vietnam 
are limited. Thus, this research aims to analyzing the impact of exchange rate and interest rate 
to the Vietnam stock market and applies APT model to analyze the impact of exchange rate 
and interest rate to stock return of VNM, FPT and KBC. 
Nguyen Thi Thanh Hai 
Faculty of Economic and Bussiness Administration, Hong Duc University 
Email: Hain2t@gmail.com ( ) 
Dinh Thi Thu Thuy 
Faculty of Economic and Bussiness Administration, Hong Duc University 
Email: Dinhthithuthuy@hdu.edu.vn ( ) 
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2. Literature review 
In reference to conventional economic reasoning, there is a negative relationship 
between the interest rate and stock market index. The higher the interest rate is, the more 
money is shifted from the high-risk instruments, for example: stocks and shares, to low risk 
ones which are savings or fixed deposit accounts. On the other hand, in case that the interest 
rate is too low, the money will no longer be kept in secure accounts, and the investors will 
draw them out to invest in stock market with the aim of gaining higher returns. 
This theory is supported by many studies. Mahmudul and Gazi (2009) performed a 
research based on the monthly data in 5 years from stock markets of both developed 
countries such as Australia, Canada, Germany, Italy, Japan, etc. and developing countries 
such as Malaysia, Philippine and found that interest rate has a significantly negative impact 
on share price. 
On the other hand, Kurihara and Nezu (2006) proved that in Japan, stock prices and 
interest rate, especially the domestic interest rate, had a quite blurred relationship. 
By using an ordinary linear regression model, after studying the stock market 
capitalization and interest rate in Nigeria, Ologunde et. al. (2006) concluded that prevailing 
interest rate has a positive influence on stock market capitalization rate. Mueller (2006) said 
that the stock market could only be affected but dominated by the interest rate. The more the 
interest rate increased, the more difficult the borrowing was. 
On the other hand, the stock market was not always expected to be affected negatively 
by the exchange rate. By a survey in Japan, Mukherjee and Naka (1995) have proved that 
exchange rate had positive impact on stock prices because of the export orientation of Japan, 
particularly, the more domestic currency was depreciated, the more exports and stock prices 
were promoted. However, in the study by Kurihara and Nezu (2006) which concluded that 
there is a “possibility that the industrial and economic structure have changed in Japan” and 
“stock prices in the United States (U.S.) do have significant impact on the stock prices in 
Japan, as U.S. is the largest trading partner of Japan”. 
By applying Kwiatkowski Philips, Schmidt and Shin coin testing techniques on 4 countries, 
Malaysia, Indonesia, Thailand and Singapore, Chong and Tan (2007) has conducted a research 
on the relationship between the macroeconomic factors such as interest rate, money supply, 
consumer price index, trade balance and composite indices and the fluctuations of exchange rate 
and concluded that this relationship was linearly in the same direction in the long term. It was 
suggested that the government and investors should “smooth the exchange rate variability and 
pursue economic policies that will give greater exchange rate stability” (Foo, 2009). 
On the other hand, a study in China by Li and Huang (2008) indicated that Renminbi 
(RMB) nominal exchange rate was integrated of order one together with the stock returns. 
However, according to Engle - Granger test, exchange rate did not generate stock returns 
because there was no relationship between the two of them with the significant level of 5 
percent in the long term (Foo, 2009). 
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In reference to Aydemir and Demirhan (2009), the exchange rate had both negative and 
positive and even mixed influence on all the stock market indicators in Turkey. However, 
Aydemir and Demirhan (2009) also indicated the only negative causal relationship between 
exchange rate and all the stock market indicators. 
3. Methodology 
The researcher will use the descriptive statistics and multiple regression models to analyze 
the data. The relationship between returns of three stocks and exchange rate (ER) and interest 
rate (IR) will be identified and verified using graphical and numerical methods. The models 
will be estimated to check for the significance of each independent variable in each model. 
The data used on this study is the monthly basic. Besides the data of interest rate and 
exchange rate on the official sources such as Ministry’s websites or General Statistical Office 
(GSO), the returns of three stocks VNM, KBC and FPT were collected in the Ho Chi Minh 
Stock Exchange. Interest rate is 6th Treasury bill rate and for exchange rate VND to USD rate is 
selected. The monthly data from 1/2010 to 6/2015 is selected for the analysis. The reason to 
select the three companies is that they are now operating well in the market with the dominating 
effect. Over the last few years, they have received a lot of attention from investors in the market. 
4. Model Estimation 
In this section, the researcher will estimate three models for three stocks where the 
dependent variables are returns; independent variables are interest rate and exchange rate. In each 
case, we explain the results, check for the suitability, check for the assumption of the models. 
4.1. Model 1. Returns on the stock of VNM 
Table 1. Regression output of returns of VNM 
Dependent Variable: RETURN_1 
Method: Least Squares 
Date: 10/29/15 Time: 02:19 
Sample: 1 66 
Included observations: 66 
 Variable Coefficient Std. Error t-Statistic Prob. 
 C 0.387696 0.148138 2.617120 0.0111 
IR -0.036973 0.002326 -15.89438 0.0000 
ER 5.17E-05 7.14E-06 7.246519 0.0000 
 R-squared 0.828860 Mean dependent var 1.105152 
Adjusted R-squared 0.823427 S.D. dependent var 0.132633 
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S.E. of regression 0.055733 Akaike info criterion -2.892092 
Sum squared resid 0.195690 Schwarz criterion -2.792562 
Log likelihood 98.43903 Hannan-Quinn criter. -2.852763 
F-statistic 152.5596 Durbin-Watson stat 0.660949 
Prob(F-statistic) 0.000000 
Table 1 above shows the regression results of the model estimating the relationship 
between the returns of stock of Vinamilk on interest rate and exchange rate. We can see that 
both of variables are significant in model by looking at the p-values in the output. It suggests 
that in the Vietnam stock market, in the case of VNM stock, interest rate and exchange rate 
really affect the return of an asset. In this case, the result shows that there is a positive 
relationship between two variables. 
R2 value of 0.83 means that about 83% of the variation in the return of VNM can be 
explained by the interest rate and exchange rate. 
The value of F statistic and respective probability shows that the model estimation is 
significant with level of 5% 
4.2. Model 2. Returns on the stock of KBC 
Table 2. Regression output of returns of KBC 
Dependent Variable: RETURN_2 
Method: Least Squares 
Date: 10/29/15 Time: 02:25 
Sample: 166 
Included observations: 66 
 Variable Coefficient Std. Error t-Statistic Prob. 
 C 0.243444 0.258953 0.940108 0.3508 
IR -0.054759 0.004074 -13.43994 0.0000 
ER 6.29E-05 1.25E-05 5.026640 0.0000 
 R-squared 0.766867 Mean dependent var 1.021473 
Adjusted R-squared 0.759347 S.D. dependent var 0.197596 
S.E. of regression 0.096934 Akaike info criterion -1.784526 
Sum squared resid 0.582559 Schwarz criterion -1.684170 
Log likelihood 60.99711 Hannan-Quinn criter. -1.744929 
F-statistic 101.9713 Durbin-Watson stat 1.216692 
Prob(F-statistic) 0.000000 
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Interest rate has a negative effect on the returns of KBC but as in the case of VNM, 
exchange rate has a positive effect. Model explains for about 67% (R2) of the variation in 
returns of KBC. Model is also significant under F test. 
Checking for assumption, we can see that normality of error terms is valid under 
Jacque-Bera test (table 2) and there is no serial correlation using the LM test (p-value is larger 
than 0.05 - table 3). There is also no heteroscedasticity under White test (table 3). 
0
5
10
15
20
25
30
-0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6
Series: Residuals
Sample 1 66
Observations 66
Mean 1.26e-16
Median -0.012151
Maximum 0.561850
Minimum -0.176371
Std. Dev. 0.095407
Skewness 3.058442
Kurtosis 19.79369
Jarque-Bera 5.1614
Probability 0.725
Figure 1. Test output of normality of residuals for model of KBC 
Table 3. Test output of serial correlation for model of KBC 
Breusch-Godfrey Serial Correlation LM Test: 
 F-statistic 2.250403 Prob. F(2,60) 0.1279 
Obs*R-squared 5.681484 Prob. Chi-Square(2) 0.1179 
Table 4. Test output of heteroscedasticity of for the model of KCB 
Heteroskedasticity Test: White 
 F-statistic 0.648823 Prob. F(5,59) 0.6635 
Obs*R-squared 3.387747 Prob. Chi-Square(5) 0.6404 
Scaled explained SS 28.96341 Prob. Chi-Square(5) 0.0000 
4.3. Model 3. Returns on the stock of FPT 
For the returns of FPT, estimation result shows that both interest rate and exchange rate 
are not significant with level of 5%, Model is also not significant. It may suggest that the 
returns of FPT (very big and attractive stock in the market) are not affected by the adjustment 
Hong Duc University Journal of Science, E.4, Vol.9, P (54 - 60), 2017 
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of macro-economic factors like interest rate or exchange rate. This is also an interesting result 
as in the previous two cases of VNM and KBC, the two factors are well significant but it is 
not the case of FPT. It is recommended that depending on each asset, the effect of factors can 
be different in terms of both direction and magnitude. 
Table 5. Regression output of returns of FPT 
Dependent Variable: RETURN_3 
Method: Least Squares 
Date: 10/29/15 Time: 02:29 
Sample: 1 66 
Included observations: 66 
 Variable Coefficient Std. Error t-Statistic Prob. 
 C -3.098261 3.275837 -0.945792 0.3479 
IR -0.090745 0.051440 -1.764089 0.0826 
ER 0.000252 0.000158 1.593901 0.1160 
 R-squared 0.082328 Mean dependent var 1.218859 
Adjusted R-squared 0.053195 S.D. dependent var 1.266598 
S.E. of regression 1.232449 Akaike info criterion 3.300272 
Sum squared resid 95.69261 Schwarz criterion 3.399802 
Log likelihood -105.9090 Hannan-Quinn criter. 3.339601 
F-statistic 2.825973 Durbin-Watson stat 2.090880 
Prob(F-statistic) 0.066782 
5. Conclusion 
5.1. Major findings 
With three stocks selected, we found out that, on the Vietnam stock market, interest rate 
plays an important role and has effect (as theory) on the returns. However, exchange rate does 
not follow the theoretical background of impact in which the relationship is positive. That is 
an interesting result from the Vietnam market. 
5.2. Recommendations 
Interest rate will be used as the key factor to adjust the operation of stock market. 
Policy makers can consider the reduction in the basic interest rate, not only to facilitate the 
growth of economy but also promote the stock market. 
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To use the exchange rate as the tool for management, it should be carefully considered 
as the effect of exchange rate adjustment is sometimes not clear to the economy in general and 
on the stock market in particular. The adjustment of exchange rate should be placed in the 
context of many changing factors in the economy that make the impact of summarized factors 
could be clear and measured. 
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