The 31st WORKSHOP
In this workshop, Mr. Pham Vu Thang Long presented a paper in his PhD dissertation, which was completed at the Graduate School of Economics, Osaka University. The main objective of the paper was to analyze abnormal returns in the stock market in Vietnam during the period January 2001-December 2005.
To begin his presentation, Mr. Long made an overview of traditional finance approach and behavioral finance approach. According to the presenter, the former is based on the Efficient Market Hypothesis (EMH) theory, in which all partners in the market have the same information sets, and thus there will be no arbitrage opportunities, and the future prices, especially at equilibrium, are rationally estimated by asset pricing models. Conversely, the latter assumes that partners in the market have different information sets, and thus they will have different behaviors. Prices are not rationally predicted, and partners in the market may under-react or over-react with market signals. For the stock markets, the overview of over-reaction hypothesis showed that extreme movements in stock prices would be followed by subsequent price movements in the opposite direction, and the more extreme the initial price movement, the greater would be the subsequent adjustment.
Based on the current status of the stock market in Vietnam, Mr. Long was interested in exploring such important research questions as (i) whether over-reaction existed, (ii) whether reversal patterns as suggested by overreaction hypothesis existed, (iii) there was profit for contrarian investments, and (iv) whether the current market had operated efficient.
Before describing in detail the model to evaluate the market, and answer the above-mentioned questions, Mr. Long made a brief review of the stock market in Vietnam, in which the Ho Chi Minh City Securities Trading Center (HCMC STC) was particularly focused as he would use data from this Center for analysis. It was shown that the number of stocks listed on the HCMC STC increased rapidly during the study period, from only 4 in 2000 to 108 in 2006. More importantly, the correlations of monthly returns on the stock market indices over the study period indicated that there was weak links between the stock market in Vietnam with other stock markets in the region.
Going further, Mr. Long described the model to estimate abnormal return, which was defined as the difference between the expected return and the realized return. The former was estimated by using the restricted Capital Asset Pricing Model (CAMP), while the latter was estimated by comparing the closing stock prices of two consecutive trading days. Furthermore, he used the Generalized Method of Moments (GMM) to estimate the abnormal return over two periods, i.e. pre-event (120 to 21 days before the event day), and post-event (from 21 to 120 day after the event day). In addition, the author also considered two types of abnormal returns, i.e. the mean abnormal return across event observations on a given day, and the cumulative abnormal return for a given stock in a given period. Test statistics are provided to check evidence of the existence of these types of abnormal returns.
[For more information about the model, please see the presentation and paper attached to this summary*].
To work on such model, Mr. Long used the data comprised of daily returns on all 33 stocks listed on the HCMC STC as of the end of December 2005, and VN-INDEX as a proxy for market index. The estimated results showed a strong evidence to support the over-reaction hypothesis in the stock market in Vietnam. In detail, the results for both mean and cumulative abnormal returns indicated that the initial price change was partially an over-reaction to whatever information caused such change. Surprisingly, the stock market in Vietnam during the study period appeared to have over-reaction to both good and bad news, particularly in the case of stock price decreases. Explaining such situation, Mr. Long showed that three factors, including market over-reaction, liquidity, and bid-ask spreads, played important roles in the short-term price reversals following large price changes.
Analyzing the current situation in Vietnam, Mr. Long showed that the Vietnamese stock market had operated inefficiently to some extent. These inefficiencies were indicated by slow price adjustments as well as potentials for arbitrage opportunities. At the end of the presentation, Mr. Long provided some suggestions for investment strategy in the market.
Mr. Khai (Yokohama National University-YNU & VDF-Tokyo) ignited the discussion section by a question about low correlations between the stock markets in Vietnam and other countries in the region. Also, he wondered about the number of observations as limited observations might not reflect the speed of changes and adjustments in the market. This question was also shared by Mr. Nam (GRIPS & State Securities Commission of Vietnam). Mr. Long responded that the trading volume in Vietnam was still small in comparison with other markets in the region. However, he added that the correlations would increase in the near future as the number of indirect investment funds increased swiftly in recent years. He also admitted that he obviously could not overcome the problem of limited data since the stock market in Vietnam started only from the year 2000, and the number of stocks listed was extremely small in the beginning years.
Being interested in both model and policy implications for Vietnam, Mr. Hoang (YNU & VDF-Tokyo) raised a list of questions and comments. He wondered whether large gap between demand and supply in the current stock market in Vietnam could influence the model choices and the estimated results. Moreover, he suggested that Mr. Long provide more detailed policy recommendations for such imperfect stock market in Vietnam in order to make the market more efficient in the coming time. Mr. Hoang also questioned about the differences between stock market adjustments in emerging and developed economies, because investors in the economies would obviously have different behaviors, and as such, under-reaction or over-reaction might be in different patterns. In response, Mr. Long said that it was apparent that the demand-supply spread would be important factor in determining the model’s results, and he would check the model again once he could get more data from the HCMC STC in coming months. About the differences in stock markets in emerging and developed economies, Mr. Long also agreed with Mr. Hoang’s comments, and he added that under-reaction and over-reaction could occur in both economies, but adjustment speed might be substantially different.
Mr. Vu (Waseda University) and Mr. Long (GRIPS & VDF-Tokyo) shared common questions of how economic prospects in Vietnam in the coming years would have impacts on the behaviors of investors on the stock market, and how these prospects would be taken into the model. Mr. Long answered that he model did not captured this information, and he would consider such important factor in extending the model.
At the end of the presentation, Mr. Huy (Lehman Brothers Japan Inc.) provided some updated information about the stock market in Vietnam, and he suggested the presenter get more updated data, particularly those of the year 2006, for the analysis as many interesting results might be found in this “hot” year.
We had a half hour to exchange information about VDF activities, including forthcoming VDF-Tokyo Conference, and book and discussion paper publications.
(By Giang Thanh Long)
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