MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
Tran Huu Nghi
OIL PRICES AND STOCK RETURNS: EVIDENCE FROM
VIETNAMESE PETROLEUM AND TRANSPORTATION
INDUSTRIES
MASTER’S THESIS
HO CHI MINH CITY 2010
MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
Tran Huu Nghi
OIL PRICES AND STOCK RETURNS: EVIDENCE FROM
VIETNAMESE PETROLEUM AND TRANSPORTATION
INDUSTRIES
Ology: Finance – Banking
Ology code: 60.31.12
MASTER’S THESIS
Advisor
PhD. Nguyen Thu Hien
HO CHI MINH CITY 2010
Acknowledgements
First of all, I would like to express my deepest gratitude and sincere thanks to
my advisor, PhD. Nguyen Thu Hien, for her valuable advice, suggestions, and
comments throughout every step of my study.
Secondly, I would like to thank all my professors for giving me fundamental and
academic knowledge during years of my study. Especially, I would like to send
my special thanks to Dr. Cao Hao Thi, who gave me necessary statistical
knowledge to finish this study.
Thirdly, my thanks would also go to my classmates, and my colleagues for their
supports and encouragements.
Finally, I would like to thank my parents, and all members in my family those
who are always by my side and encourage me during my study.
i
Abstract
The study aims to examine the impact of oil price changes on the stock returns
in Vietnam market by analysing daily data during the period from January 2006
to December 2009. The international multi-factor model is taken as an approach
in the paper in order to investigate the relationship between oil price changes
and stock returns of Ho Chi Minh Stock Exchange, petroleum, and
transportation industries on Ho Chi Minh Stock Exchange. Evidence shows that
there are significant links between oil price changes of the previous day and
stock returns of these two industries and HoSE. These results are useful for
investors, managers, and policy makers.
ii
TABLE OF CONTENTS
Acknowledgements..............................................................................................i
Abstract...............................................................................................................ii
TABLE OF CONTENTS...................................................................................iii
LIST OF FIGURES.............................................................................................v
LIST OF GRAPHS..............................................................................................v
LIST OF TABLES.............................................................................................vi
ABBREVIATIONS...........................................................................................vii
CHAPTER 1: INTRODUCTION
1.1 Rationale of the study..................................................................................01
1.2 Research questions and objectives..............................................................03
1.3 Scope and limitation....................................................................................03
1.4 Research methodology................................................................................03
1.5 Significance of the study.............................................................................04
1.6 Structure of the study..................................................................................04
CHAPTER 2: LITERATURE REVIEW
2.1 Theoretical background...............................................................................06
2.1.1 Market efficiency................................................................................06
2.1.2 Capital Asset Pricing Model (CAPM)................................................08
2.1.3 Arbitrage Pricing Theory (APT).........................................................10
2.1.4 Oil price changes and rationality of Stock market..............................12
2.2 Previous researches.....................................................................................14
CHAPTER 3: METHODOLOGY AND DATA
3.1 Research methodology................................................................................17
3.1.1 Research design...................................................................................17
3.1.2 Quantitative research...........................................................................18
iii
3.2 Data description...........................................................................................22
3.2.1 Stock returns........................................................................................24
3.2.2 Oil price changes.................................................................................27
3.2.3 Exchange rate returns..........................................................................28
CHAPTER 4: DATA ANALYSIS
4.1 Desciptive statistics.....................................................................................29
4.2 Regression results........................................................................................31
4.2.1 Correlations.........................................................................................31
4.2.2 Regression results with OILt-1.............................................................33
4.3 Summary of regression results....................................................................44
CHAPTER 5: CONCLUSIONS
5.1 Overview.....................................................................................................46
5.2 Summary of findings...................................................................................47
5.3 Limitations and further researches..............................................................50
References........................................................................................................52
Appendices
Appendix 1: Vietnam petro prices 2006-2009.............................................55
Appendix 2: Regulated amplitude of exchange rate 2006-2009..................56
iv
LIST OF FIGURES
Figure 1.1: Structure of the study...............................................................................01
Figure 3.1: Research design.......................................................................................17
Figure 3.2: Research hypotheses................................................................................19
Figure 4.1 Hypothesis H1 testing result.....................................................................36
Figure 4.2 Hypotheses H2, H3, H7 and H8 testing results........................................41
LIST OF GRAPHS
Graph 1.1: Oil prices and VNindex in 2008..............................................................01
Graph 3.1: Fluctuation of oil price 2006-2009...........................................................23
Graph 3.2: Fluctuation of VNindex 2006-2009.........................................................23
Graph 4.1: Histograms and Q-Q plots of daily stock returns.....................................30
Graph 4.2 Histogram and Q-Q plot of index residual................................................36
Graph 4.3: Histogram and Q-Q plot of petro residual...............................................42
Graph 4.4 Histogram and Q-Q plot of trans residual.................................................42
v
LIST OF TABLES
Table 3.1: Testing hypotheses for the significance....................................................22
Table 3.2: List of stocks in the petroleum industry....................................................26
Table 3.3: List of stocks in the transportation industry..............................................26
Table 4.1: Descriptive statistics of stock returns, oil price changes, and exchange rate
returns.........................................................................................................................29
Table 4.2: Correlations of Indext, Petrot, Transt with OILt and TWEXt....................32
Table 4.3: Correlations of Indext, Petrot, Transt with OILt-1.......................................34
Table 4.4: Regression analysis of the relation between Indext and OILt-1.................35
Table 4.5 Hypothesis H1 testing result......................................................................36
2
Table 4.6 Regression analysis of the relation between Ln( ε Indext
) and E(Indext)........38
Table 4.7 Regression analysis of the relation between Petrot and OILt-1...................38
Table 4.8 Regression analysis of the relation between Transt and OILt-1..................39
Table 4.9 Hypotheses H2, H3, H7 and H8 testing results..........................................40
Table 4.10 Correlation between OILt-1 and Index residual........................................41
Table 4.11 Corelation between OILt-1 and Index residual..........................................43
2
Table 4.12 Regression analysis of the relation between Ln( ε Petrot
) and E(Petrot)......44
2
Table 4.13 Regression analysis of the relation between Ln( ε Transt
) and E(Transt)......45
Table 5.1 Changes in ROE.........................................................................................48
Table 5.2 Summary of the study hypotheses testing results......................................50
vi
ABBREVIATIONS
ADF
Augmented Dickey – Fuller
APT
Arbitrage Pricing Theory
CAPM
Capital Asset Pricing Model
GCC
Gulf Cooperating Council
HoSE
Ho Chi Minh Stock Exchange
OLS
Ordinary Least Square
ROE
Return on Equity
vii
Page 1
Chapter 1 Introduction
CHAPTER 1: INTRODUCTION
This chapter introduces the rationale of the study, research questions and
objectives. The study scope, significance, and the structure of the study are
also discussed in this chapter.
1.1 RATIONALE OF THE STUDY
Oil is a very essential energy for any country all over the world. Changes in
oil price have become one of the most important factors that contribute to
current global economic activity. Oil price hikes would make price in
commodities increase, and in turn, hearten global inflation and slow down
economic growth.
Moreover, oil is one of the operational cost factors. The higher oil price
increases, the higher production cost is. For this reason, oil price hikes will
cause expected earnings to decline, which bring a decrease in stock prices. In
other words, increasing oil price potentially affects stock market performance
by altering financial performance or cash flows of companies. As illustration
of this, the oil price increased 52.67% between January 2008 and June 2008,
and VNindex decreased 52.68% on the same period.
160
700
600
500
120
400
300
200
100
0
140
100
80
60
40
20
0
Oil Pric e (U
S$per barrel)
900
800
Ja
n0
Fe 8
bM 08
ar
-0
Ap 8
rM 08
ay
-0
Ju 8
n0
Ju 8
l-0
Au 8
gSe 08
p0
O 8
ct
-0
No 8
vDe 08
c08
VNindex
Graph 1.1: Oil prices and VNindex in 2008
VN
index
Oil Pric e
Chapter 1 Introduction
Page 2
Many papers in the world investigated the relationship between oil price
changes and the stock returns. However, the results were various. For
instance, using an international multifactor model, Basher and Sadorsky
(2006) showed a significant relationship between oil price changes and stock
markets in emerging countries. By contrast, other papers showed that oil
price changes do not have significant impacts on stock returns (Chen, Roll,
and Ross - 1986, Agusman and Deriantino – 2008) or oil future returns are
not correlated with stock market returns, except in the case of oil company
returns (Huang et al. – 1996) or changes in oil price affect trivially real stock
returns in net oil exporting countries (Jones and Kaul – 1996).
Thus, whether there is any relationship between oil price changes and
Vietnam stock returns or not is still a big question without answer. Therefore,
the aim of the study is to examine the impact of oil price changes on Vietnam
stock returns in order to find out the answer for that big question. The study
is important because of several reasons:
• First, Stock market contribution to the Vietnam economy, which is
indicated by the share of market capitalisation to GDP, has been
increasing rapidly. In 2005, market capitalisation to GDP was 0.69%. It
went up sharply to 22.6% in 2006, and by the end of 2007 was 40%. It is
clear that the role of the stock market in the domestic economy is more
and more significant, and it is important to examine any risk factors
contribute to stock performance, including changes of oil price.
• Second, it expects that oil price changes would influence the domestic
economy, and this could be caused by their impact on the stock market.
However, very limited research on this has been made. By examining the
Vietnam data, the study will contribute to the literature on this area.
Chapter 1 Introduction
Page 3
1.2 RESEARCH QUESTIONS AND OBJECTIVES
The objectives of the study are to examine the impact of oil price changes on
Vietnam stock exchange market in general, and to measure the impact of oil
price changes on stock returns of petroleum and transportation industries by
using daily data during the period from January 2006 to December 2009.
The study will be the answer for these questions:
• Is there a relationship between oil price and stock returns in Vietnam?
• How does oil price affect to the Vietnam stock market in general, and to
stock returns of petroleum and transportation industry in particular?
1.3 SCOPE AND LIMITATION
Due to time restriction, the study will examine the impact of oil price changes
on Ho Chi Minh Stock Exchange, and measure the impact of oil price
changes on stock returns of petroleum and transportation industry on Ho Chi
Minh Stock Exchange, which are two on many industries affected directly by
oil price changes. Data will be collected during the period from January 2006
to December 2009 on Ho Chi Minh Stock Exchange.
1.4 RESEARCH METHODOLOGY
This study uses the multiple regression model for the stock returns of Ho Chi
Minh Stock Exchange, and petroleum and transportation industries to define
the relationship between oil price and Vietnam stock returns, and to measure
this relationship.
The data for this study consist of daily oil price changes, and stock returns
during the period from 2006 to 2009. Daily stock returns are calculated from
closing prices of HoSE index, and stocks in petroleum and transportation
industries. Oil prices are the West Texas Intermediate Spot prices FOB of
crude oil, which are available from the Energy Information Administration.
Page 4
Chapter 1 Introduction
1.5 SIGNIFICANCE OF THE STUDY
• Examining the impact of oil price changes on the stock returns helps
government to make plans and macroeconomic policies based on
predicting of oil price changes so that they could regulate more effectively
the Stock Exchange particularly and the domestic economy generally.
•
Besides, it also gives investors evidences that help them to analyse and to
manage their portfolios more efficiently.
1.6 STRUCTURE OF THE STUDY
The study consists of 5 chapters:
-
Chapter 1 (Introduction) introduces the study. This chapter includes the
rationale of the study, research objectives, research methodology,
significance of the study, and scope and limitation.
-
Chapter 2 (literature review) shows theoretical background related to
the study, and previous researches in the study’s field.
- Chapter
3
(Methodology
and
data)
discusses
the
research
methodology, and describes the data used in the study as well.
-
Chapter 4 (data analysis and findings) analyses data and finds out the
impact of oil price changes on stock returns based on the analysed
data.
-
Chapter 5 (conclusions) summarises the study, indicates limitations
and suggests possible further researches.
Page 5
Chapter 1 Introduction
Figure 1.1: Structure of the study
Chapter 1: Introduction
Chapter 2: Literature review
Chapter 3: Methodology and data
Chapter 4: Data analysis
Chapter 5: Conclusions
Chapter 2 Literature Review
Page 6
CHAPTER 2: LITERATURE REVIEW
This chapter discusses in details the theoretical background related to the study,
such as Market Efficiency, Capital Asset Pricing Model, and Arbitrage Pricing
Theory. Some previous researches are also introduced in this chapter.
2.1 THEORETICAL BACKGROUND
2.1.1 Market Efficiency
In finance, there are some models which describe the structure of stock prices
based on different factors, such as Capital Asset Pricing Model, and Arbitrage
Pricing Theory. In fact, investors are much interested in how fast stock prices
fluctuate in response to changes to the relevant factors. In order to examine these
changes, it is very necessary to understand the concept of financial market
efficiency.
The efficient-market hypothesis was first expressed by Louis Bachelier in his
1900 dissertation, “The Theory of Speculation”. Bachelier recognises that “past,
present and even discounted future events are reflected in market price, but
often show no apparent relation to price changes”. However, his work was
largely ignored until 1950s.
The efficient-market hypothesis was developed by Professor Eugene Fama at the
University of Chicago Booth School of Business as an academic concept of
study through his published Ph.D. thesis in the early 1960s at the same school. It
was generally believed that securities markets were extremely efficient in
reflecting information about individual stocks and about the stock market as a
whole. The accepted view was that when information arises, the news spreads
very quickly and is incorporated into the prices of securities without delay.
Thus, neither technical analysis, which is the study of past stock prices in an
Chapter 2 Literature Review
Page 7
attempt to predict future prices, nor even fundamental analysis, which is the
analysis of financial information such as company earnings, asset values, etc., to
help investors select “undervalued” stocks, would enable an investor to achieve
returns greater than those that could be obtained by holding a randomly selected
portfolio of individual stocks with comparable risk.
There are three common forms of financial market efficiency, which were
defined in a published paper of Fama in 1970: weak-form efficiency, semistrong-form efficiency and strong-form efficiency, each of which has different
implications for how markets work.
In weak-form efficiency, future prices cannot be predicted by analyzing price
from the past. Excess returns can not be earned in the long run by using
investment strategies based on historical share prices or other historical data.
Technical analysis will not be able to consistently produce excess returns,
though some forms of fundamental analysis may still provide excess returns.
Share prices exhibit no serial dependencies, meaning that there are no "patterns"
to asset prices. This implies that future price movements are determined entirely
by information not contained in the price series. Hence, prices must follow a
random walk.
In semi-strong-form efficiency, it is implied that share prices adjust to publicly
available new information very rapidly and in an unbiased fashion, such that no
excess returns can be earned by trading on that information. Semi-strong-form
efficiency implies that neither fundamental analysis nor technical analysis will
be able to reliably produce excess returns.
In strong-form efficiency, share prices reflect all information, public and private,
and no one can earn excess returns. If there are legal barriers to private
information becoming public, as with insider trading laws, strong-form
Chapter 2 Literature Review
Page 8
efficiency is impossible, except in the case where the laws are universally
ignored.
2.1.2 Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model (CAPM) is used to specify the relationship
between risk and required rates of return on assets when they are held in welldiversified portfolios. The model takes into account the asset's sensitivity to
non-diversifiable risk (also known as systematic risk or market risk), often
represented by the quantity beta (β) in the financial industry, as well as the
expected return of the market and the expected return of a theoretical risk-free
asset.
The model was introduced by Jack Traynor (1961, 1962), William Sharpe
(1964), John Lintner (1965a,b) and Jan Mossin (1966) independently, building
on the earlier work of Harry Markowitz on diversification and modern portfolio
theory. Sharpe, Markowitz and Merton Miller jointly received the Nobel
Memorial Prize in Economics for this contribution to the field of financial
economics.
Basic assumptions of the CAPM1:
1. All investors focus on a single holding period, and they seek to maximize
the expected utility of their terminal wealth by choosing among
alternative portfolios on the basic of each portfolio’s expected return and
standard deviation.
2. All investors can borrow or lend an unlimited amount at a given risk-free
rate of interest, and there are no restrictions on short sales of any asset.
1
Eugenne F.Brigham, Michael C. Ehrhardt, Financial Management Theory and Practice, Tenth Edition, page
257
Chapter 2 Literature Review
Page 9
3. All investors have identical estimates of the expected returns, variances,
and covariances among all assets; that is, investors have homogeneous
expectations.
4. All investors are price takers (that is, all investors assume that their own
buying and selling activity will not affect stock prices)
5. There are no transactions costs or taxes.
6. All assets are perfectly divisible and perfectly liquid.
7. The quantities of all assets are given and fixed.
8. All information is available at the same time to all investors.
9. The market is perfect competitive.
The formula:
The CAPM is a model for pricing an individual security or a portfolio.
The Capital Market Line (CML) specifies the relationship between risk and
return for an efficient portfolio that is a combination of the risk-free security and
the market-value-weighted portfolio of all risk assets in the economy.
CLM: E(Rp) = Rf +
E(RM) - Rf
σ
M
* σ
p
where:
⋅ E(Rp) is the expected return of the portfolio
⋅ E(RM) is the expected return of the market
⋅ Rf is the risk-free rate of interest, such as interest arising from government
bonds
⋅ σ
M
is the standard deviation of the market
Chapter 2 Literature Review
⋅ σ
p
Page 10
is the standard deviation of the portfolio
For individual securities, Security Market Line (SML) is used to show the
relationship between risk and return.
SML: E(Ri) = Rf + [E(RM) - Rf] * βi
where:
⋅ E(Ri) is the expected return of the capital asset
⋅ βi (Beta coefficient) is the sensitivity of the expected asset returns to the
expected market returns, or also
βi =
Covariance between asset i and the market
Variance of market returns
=
Cov (Ri, RM)
σ
2
M
⋅ [E(RM) - Rf ] is called the market risk premium.
2.1.3 Arbitrage Pricing Theory (APT)
In finance, Arbitrage Pricing Theory (APT) is a general theory of asset pricing,
that has become influential in the pricing of stock. The theory was initiated by
the economist Stephen Ross in 1976. Ross argues that if equilibrium prices offer
no arbitrage opportunities over static portfolios of the assets, the expected
returns on the assets are approximately linearly related to the factor loadings.
Unlike CAPM, a single-factor model, APT can include any number of risk
factors, so the required rate of return could be a function of two, three, four, or
more factors. Thus, the return of risk assets can be expressed as follow:
Ri = E(Ri) + [F1 – E(F1)]* βi1 + … + [Fj – E(Fj)]* βij + εi
where
⋅ Ri is the realised rate of return on Stock i
Chapter 2 Literature Review
Page 11
⋅ E(Ri) is the expected rate of return on Stock i
⋅ Fj is the realised value of economic Factor j
⋅ E(Fj)] is the expected value of economic Factor j
⋅ βij is the sensitivity of Stock i to economic Factor j
⋅ εi is the effect of unique events on the realised return of Stock i (or
idiosyncratic risk of Stock i)
Theoretically, an investor could construct a portfolio such that (1) the portfolio
was riskless and (2) the net investment in it was zero. Such a zero investment
portfolio must have a zero expected return, or else arbitrage operations would
occur and cause the prices of the underlying asset to change until the portfolio’s
expected return was zero (Eugenne F.Brigham and Michael C. Ehrhardt).
Therefore, the APT equivalent of the CAPM’s Security Market Line can be
developed as follow:
Ri = Rf + (R1 – Rf)* βi1 + … + (Rj – Rf)* βij
Here Rj is the required rate of return on a portfolio that is sensitive only to the jth
economic factor (βj = 1) and has zero sensitivity to all other factors.
The primary theoretical advantage of the APT is that it permits several economic
factors to influence individual stock returns, whereas the CAPM assumes that
the effect of all factors, except those unique to the firm, can be captured in a
single measure, the volatility of the stock with respect to the market portfolio.
Also, the APT requires fewer assumptions than the CAPM and hence is more
general. Finally, the APT does not assume that all investors hold a market
portfolio, a CAPM requirement that clearly is not met in practice.
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