1.

0 Introduction

This research has study on the impact of world oil price on Vietnam’s stock market.
In this paper, we are going to identify and examine the factors that affecting Vietnam’s stock
market such as world oil prices, crude oil production in Vietnam, short term interest rate and
exchange rate of VNU to USD. Generally, crude oil is one of the important commodities that
traded actively in the world. Next, crude oil price is to measure the spot price of barrels of oil
mostly focused on West Texas Intermediate (WTI) and Brent Blent, and partly to OPEC
basket price and Northen Minerals and Exploration Ltd (NMEX) futures price. Besides that,
the price of crude oil may affected the other assets such as stocks, bonds and currencies due
to the fact that it is a main source of energy in the world.

Moreover, crude oil production is measured by using in units of volume, weight and
thermal energy. According to British Petroleum (BP) statistics, Vietnam has ranked at 28th
among 52 countries which have the potential in oil and gas over the world. By the end of
2015, the proven crude oil reserves of Vietnam were approximately 4.4 billion barrels and
ranked first place in Southeast Asia, while the proven gas reserves were about 0.6 trillion
cubic metres (Tcm) and ranked at the 3rd place in the South East Asia and also in Asia-Pacific
region as according to Oil & Gas Journal (OGJ). This increase is in part a result of Vietnam’s
efforts to intensify exploration and development of its offshore fields.
In general, short-term interest rates is refers to interest rates on loan contracts or debt
instruments such as Treasury bills, bank certificates of deposit or commercial paper which
having maturities of less than one year. Often called money market rates. Stock prices have
been investigated for their relation to domestic macroeconomic indicators such as interest
rates and exchange rate. In theory, the relationship between stock prices and the interest rate
is controlled by investors in portfolios of bonds and stocks (Apergis and Eleftheriou, 2002).
With higher interest rates, investors prefer bond as this implies that stock prices will decrease.
On the contrary, a decrease in interest rates leads to an increase in stock prices. This negative
relationship has been found by Gjerde and Sættem (1999), Wongbangpo and Sharma (2002),
Paul and Mallik (2003), Nasseh and Strauss (2004), McMillan (2005), Puah and Jayaraman
(2007) and Reilly et al. (2007). To sum up, the theory suggests a negative association
between stock prices and interest rates. However, we are going to investigate the relationship
between short-term interest rates and Vietnam’s stock prices in this paper.
 In terms of the relationship between stock market returns and exchange rate, Johnson
and Soenen (1998) state depreciation may cause the cost of imports to increase, leading to
domestic price level increases, which would expectedly have a negative impact on stock
prices. Morley and Pentecost (2000) also confirm that stock markets and exchange rates are
linked, and note that this connection is through a common cyclical pattern rather than a
common trend. While causality analysis is widely discovered in both developed and newly
emerging markets, only a few studies have been conducted for emerging markets such as
Vietnam. A recent notable study for the Vietnamese stock market is that of Nguyen (2006).
Applying the Engle-Granger cointegration tests, she find no evidence for cointegration
between the VN-Index and macroeconomic variables such as industrial output, inflation rates,
money supply, exchange rates, imports and exports using data that span from July 2000 to
June 2006. Based on these findings, she concludes that the Vietnamese stock market is
informationally inefficient with respect to all selected macroeconomic variables.

As according to the studies of International Monetary Fund (IMF) and International

Energy Agency (IEA), the oil price shocks has more impacts on the developing countries
compared to developed countries. As according to Basher and Sadorsky (2006), the volatility
in oil prices has effect on the stock prices and profits in developing economies. There are a
lot of empirical studies have explored the relationship between changes in oil prices and the
stock markets. Basically, most of the studies on relationship between world oil prices and
stock markets have focused on the developed countries such as Europe countries and U.S.
country. While there is less studies have focused on the Asia-Pacific countries. This case has
motivated us to choose an Asian country to analyse the world oil prices effect on its stock
markets. Although there is only a few of study in Asia- Pacific, one of research paper which
published by Narayan and Narayan (2010), has proved that the oil prices have a positive and
statistically significant effect on Vietnamese stock prices. Besides that, the cointegration of
stock prices, oil prices, and nominal exchange rates has been included in the research paper.
The contribution of this paper has motivated us to choose the Vietnam as our research
country by adding in other macroeconomic variables.
Next, the research with topic “Impact of world oil price on Vietnam’s stock market”
is divided into 5 sections. First section provides the introduction which has including
background of study, research issues and the objectives of study. Section 2 provides a
literature reviews on the impact of world oil price and Vietnam’s stock markets. In section 3,
we discuss about the methodology which covered the data descriptions, theoretical
framework, empirical framework and also research methods. Section 4 will discuss about our
empirical findings and the results. In the final section, we discuss about the policy implication
and the conclusion of the study.

The impact of macroeconomic indicators on Vietnamese stock prices (PDF Download

Available). Available from:
https://www.researchgate.net/publication/228456891_The_impact_of_macroeconomic_indic
ators_on_Vietnamese_stock_prices [accessed May 10, 2017].
https://www.worldenergy.org/data/resources/country/vietnam/oil/
https://www.vpi.pvn.vn/upload/file/TCDK/2016/Thang%2011/Le%20Viet%20Trung.
pdf
http://oilgasvietnam.com/post/97/Industry-Facts.html

Read more:
http://www.nasdaq.com/investing/glossary/s/http%3a%2f%2fwww.nasdaq.com%2finvesting
%2fglossary%2fs%2fshort-term-interest-rates#ixzz4gdp8ycdy

http://fde.ueh.edu.vn/attachments/article/110/Stock%20Prices%20and%20Macroecon
omic%20Variables%20in%20Vietnam.pdf

As according to the studies of International Monetary Fund (IMF) and International

Energy Agency (IEA), the oil price shocks has more impacts on the developing countries
compared to developed countries.
 As according to Basher and Sadorsky (2006), the volatility in oil prices has effect on
the stock prices and profits in developing economies.

In general, Vietnam is an emerging country. The economy of Vietnam is so long

recognized as relied heavily on the export of crude oil. As evidence, it has contributed to
GDP by around 18-20 percent and around 25-30 percent to government revenue per year.
Besides of being crude oil exporter, Vietnam is also an importer of the refined petroleum
products to meet the demand of its local consumption. Hence, Vietnam is vulnerable to oil
price volatility as it is one of the country who export and import refined petroleum products
in the same time. Over the last 5 years, Vietnam’s stock market has grown rapidly (Vinh,
2011). Besides that, we conducted a study to examine the relationship between world oil
prices and Vietnam’s stock prices by including the macroeconomic variables which are crude
oil production in Vietnam, short term interest rate and exchange rate of VNU to USD.
Recently, there are a lot of research papers were discussed about the impact of the
world oil prices on their country’s stock markets. Mostly results showed that there is a
statistically significant effect between the relationship of the oil prices on stock markets.
Apart from that, the extreme and sudden oil price changes can have a huge effect on the real
economy in countries due to the behaviour of consumer and firm (Park and Ratti, 2008).
There are a lot of empirical studies have explored the relationship between changes in oil
prices and the stock markets. In the empirical studies, they find that the oil price shocks have
significant effect on economic activity such as output, whereby it indirectly caused an effect
on the stock markets.
Basically, most of the studies on relationship between world oil prices and stock
markets have focused on the developed countries such as Europe countries and U.S. country.
While there is less studies have focused on the Asia-Pacific countries. This case has
motivated us to choose an Asian country to analyse the world oil prices effect on its stock
markets. Although there is only a few of study in Asia- Pacific, one of research paper which
published by Narayan and Narayan (2010), has proved that the oil prices have a positive and
statistically significant effect on Vietnamese stock prices. Besides that, the cointegration of
stock prices, oil prices, and nominal exchange rates has been included in the research paper.
The contribution of this paper has motivated us to choose the Vietnam as our research
country by adding in other macroeconomic variables.
 In this paper, we have employ an Ordinary Least Squares (OLS) to examine the
effects of world oil prices and exchange rate of VDN to USD on stock prices in Vietnam. The
results showed that the world oil prices and exchange rate has statistically significant effects
on the Vietnam’s stock prices. Besides that, we extend our work from a bivariate to a
multivariate by adding in the variables of crude oil production in Vietnam and short term
interest rate to test whether there is a statistically significant effect on Vietnam’s stock prices.
In addition, the results show that the variables added has statistically significant effect to
Vietnam’s share prices.
Next, the research with topic “Impact of world oil price on Vietnam’s stock market”
is divided into 5 sections. First section provides the introduction which has including
background of study, research issues and the objectives of study. Section 2 provides a
literature reviews on the impact of world oil price and Vietnam’s stock markets. In section 3,
we discuss about the methodology which covered the data descriptions, theoretical
framework, empirical framework and also research methods. Section 4 will discuss about our
empirical findings and the results. In the final section, we discuss about the policy implication
and the conclusion of the study.

1.1 Background of study

The changes of world oil prices play a significant role to the impact on stock markets.
The higher oil prices will lead to the slowdown of economic growth in the country that relied
heavily on the use of oil productions. Generally, there is an unstable change in crude oil
prices which showing extraordinary up and down starting from the first half 2008 and the late
of the year. In specific, the prices of crude oil per barrel has dropped even worst is 2014
which the price is fixed below $50 per barrel. Therefore, the unstable oil prices lead to the
stock exchange panics which eventually lead to the economic and financial instability.
Theoretically, the oil prices will have a statistically significant effects on the stock markets.
The effects of oil prices on the Vietnam’s stock prices also can be proven through this
research paper.
Since 1986, Vietnam has made a lot of important changes in order to turn the
economy into market-oriented one. The changes had included the reform of banking system
and additional of other financial components. Next, Vietnam has launching the first stock
market as to build a market-driven financial economy which named Ho Chi Minh City
Securities Trading Center (HSTC). The Vietnam’s stock exchange has been nurtured over
seven years thus become a symbolic change to the Vietnamese contemporaneous financial
system.
In 2007, the Center has been changed to Ho Chi Minh Stock Exchange or so-called
HOSE. Besides that, the stock of Hanoi in Vietnam which named Hanoi Securities Trading
Center (HaSTC) has been issued in 1998 but officially started in March 8, 2005. Apart from
that, HaSTC develops into a decentralized market in line with development of Vietnamese
stock markets starting from 2007 and onwards. Currently, there are two types of stock
markets in Vietnam which are HSTC and HaSTC.
Moreover, the VN-Index has been considered as a capitalisation weighted index of all
the companies listed on the HOSEs. In this case, the index value of 100 as referred to July 28,
2000 has been set as the base index value. Since 2003, there is only 22 listed companies on
the Vietnam’s stock market. After the surging of Vietnam’s stock market, the number of
listed companies boomed up to 171 in 2008. In specific, the market capitalisation of the listed
companies has increased from 1% of GDP in 2004 to 28.5% of GDP in year 2007.

Meanwhile, the stock price index has rose sharply which the Ho Chi Minh City Stock
Market Price index rose by 281% between the years of 2005 to 2007. In addition, Vietnam’s
stock market is relatively less developed as compared to the other emerging markets such as
China, India and South Africa. While the speed to growth of the stock market in Vietnam is
relatively faster than the other emerging countries. As evidence, the annual average growth
rate in market capitalisation as a percentage of GDP over the period 2003-2007 was 456% in
Vietnam, followed by China (64.8%), India (36.5%), and South Africa (16.8%).

1.2 Research issues

Oil productions is very important to every nation in terms of economy growth and
financial stability. In 2008, where it is the year that happened a lot of crude oil prices issues.
As reported in July, 2008 that the crude oil prices had recorded as the highest prices of
$147.02 per barrel. While there is a big declining of crude oil prices per barrel at the second
half 2008. As according to James Smith (2009), he had explained the issues economically
that the demand for oil has a big dropped around the world because of the declining in
economic. Besides that, he also claimed that the oil suppliers besides of the OPEC producers
has a significant impact on the oil prices. The rising of oil reserves for non-OPEC producers
has increase the supply of oil while the demand for oil is remain unchanged.
http://www.rff.org/blog/2009/2008-oil-price-shock-markets-or-mayhem
In this paper, we have study the duration starting from the January 2012 to December
2015 for the oil prices effect on stock markets. The reason why we start in year 2012 is due to
the crude oil prices has rose during the first quarter of 2012 that caused by the international
supply disruptions which can increase the petroleum price. The oil prices reached a peak in
March which recorded the price of crude oil per barrel is above $100 for both Brent and
U.S.WTI. After that, the second quarter of 2012 has shown that the decreasing of crude oil
prices which recorded as 30% decreasing from the first quarter of the year. The oil prices
then rose up again in third quarter of 2012 and remains a minor changes oil prices between
2012 to the first half of 2014. In the second half of 2014, there is a sharp dropped of crude oil
prices which the prices of crude oil per barrel is below $50.

The issues have been found due to the sharp dropped of crude oil prices in 2014 and it
is quite related to the Vietnamese stock market. In 28 November 2014, PetroVietnam has saw
its shares price traded at the floor price for the first time in this year. The following problem
has lead both of the domestic and foreign investors to sell their shares in order to stop losses.
Not only that, the problem caused the shares of enterprises in other business decline at the
same time. In Kim Chi’s article, which stated that the pricing expert- Dr.Ngo Tri Long said
the situation of decreasing in oil prices is nothing to worry about. As explain by Long, the
decrease of fuel prices can bring benefit to the Vietnamese enterprises which can increase the
shares prices of the enterprises. http://english.vietnamnet.vn/fms/business/117854/global-
crude-oil-prices-affect-vietnam-s-financial-market.html

References
Vinh, N. T. T. (2011). The impact of oil prices, real effective exchange rate and inflation on
economic activity: Novel evidence for Vietnam (No. DP2011-09).
Park, J., & Ratti, R. A. (2008). Oil price shocks and stock markets in the US and 13 European
countries. Energy Economics, 30 , 2587-2608.