University of Warsaw

Faculty of Economic Sciences

Quang Hung Nguyen

Testing the weak-form efficiency of Vietnamese

stock market, case of Ho Chi Minh Stock Exchange
2006-2010

Quantitative Finance

The thesis written under the supervision of

Dr. Michał Brzozowski

Chair of Macroeconomics and International Trade Theory

Faculty of Economic Sciences, University of Warsaw

Warsaw, 02/2013

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 Abstract

The purpose of the following dissertation is to analyze and determine the viability and ultimately

the competitiveness of the emerging Vietnamese Stock Market in comparison to the more well-

known and successful stock markets throughout the world. The first step in this analysis and the

focus of this essay is to determine whether this Vietnamese Stock Market is weak form efficient

at this stage of the game. This determination depends on analyzing two different approaches.

The first the test used is of randomness; second, the test of predictability. To fully determine the

results of each, the analysis will primarily focus on an examination of the validity and

applicability of both implemented approaches. There are essentially three tests involved to

examine randomness: 1) The portmanteau test of auto-correlations; 2) the unit root tests, and 3)

the Lo and MacKinlay's variance ratio test. In an attempt to measure random walk hypothesis of

this market, these tests were summarily applied. They revealed that there are, indeed, substantial

deviations from random walk hypothesis of the returns in the stock market in Vietnam.

Additionally, predictability was the next goal. Tests of technical trading rules were used in order

to measure predictability of the Vietnamese Market. These tests showed that the prices of stock

changes in the Vietnamese market can be predictable. This predictability means that trading cost

nets can be profitably exploited. In light of these results, the logical conclusion that can be

gleaned is that the Vietnamese stock market is not weak-form efficient.

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 Keywords

Efficient market Hypothesis, Vietnam stock market, Random walk, emerging stock market, market
efficiency.

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 TABLE OF CONTENTS

CHAPTER I. INTRODUCTION 4
1.1 Introduction 4
1.2 Background and Objective 4
1.3 Research Methodology 5
1.4 Outline 5

CHAPTER II. OVERVIEW OF VIETNAM STOCK MARKET 6

2.1.Overview 6
2.2. Background of Vietnamese stock market 7
2.2.1 The shareholding reforms 7
2.2.2 The Stock Exchange 7
2.3. The structure and organization 11
2.3.1 The State securities commission 11
2.3.2 Securities Trading Center 12
2.3.3 Securities companies 12
2.3.4 Requirement for listing 13
2.3.5 Information disclosure 14
2.3.6 Trading 15
2.3.7 VNINDEX 15

CHAPTER III. THEORETICAL FRAMEWORK AND EMPIRICAL RESULTS 16

3.1. Efficient Market Hypothesis 16

3.1.1 The development of Efficient Market Hypothesis 17
3.1.2 Weak Form 17
3.1.3 Semi-Strong Form 18
3.1.4 Strong Form 18
3.2. Empirical evidence on Efficient Market Hypothesis 19
3.2.1 Evidence from developed markets 19
3.2.2 Evidence from emerging stock markets 20
3.3. Random Walk 23
3.4 Technical Trading Rule 24

CHAPTER IV. DATA AND RESEARCH METHODOLOGY 25

4.1.Data 25
4.2 Research approach 25
4.2.1 Deductive and Inductive 25
4.2.2 Positivism and Interpretivisim 26
4.2.3 Quantitative and Qualitative research 26
4.3 Methodology 27

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 4.3.1Tests of Randomness 27
Explanation of methods chosen 28
Portmanteau tests 29
BDS Test 30
Unit root test 30
Variance Ratio test 31
4.3.2 Tests of Technical analysis 32

CHAPTER V. EMPIRICAL RESULT AND ANALYSIS 34

5.1 Test of Random walk hypothesis 34

5.1.1 Autocorrelation test 34
5.1.2 Unit root test 35
5.1.3 Variance Ratio test 36
5.2 Tests of Technical analysis 37
5.2.1 VMA results 37
5.2.2 FMA results 40
5.3 Summary of test‘s results 42

CHAPTER VI. CONCLUSIONS 43

EXTENSION 44

BIBLOGRAPHY 45

Acknowledgment

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I want to express my gratitude to Dr. Michał Brzozowski, my supervisor for his precious
guidance during preparation of this thesis.
I want to thank to my parents and Duong Hoang, my best friend for their love and support.
Fulfilling this goal would not have been possible without them.

Abbreviation
HOSE HoChiMinh Stock Exchange
HASTC Hanoi Stock Trading Center
GDP Gross Domestic Product
IPO Initial Public Offering
OLS Ordinary Leased Square
SSC State Securities Commission of Vietnam
VND Vietnam Dong (National Currency Unit)

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CHAPTER I. INTRODUCTION

1.1 Introduction
Over the past 30 years, the efficient market hypothesis (EMH) has been widely mentioned in the
financial literature by many financial economists because it has an important implication in a
reality. Fama (1970) suggested an ideal about the market in which the price of securities at any
time ―fully reflects‖ all the available information which happens at that time. If it occurs, we can
conclude that is the efficient market. According to the Fama‘s work, the efficient market
hypothesis has been researched in not only developed markets but also in emerging markets in
order to classify them into three levels which are depended on the available of information
named weak form, semi-strong form and strong form. After doing the initial research about the
efficient market hypothesis, I chose the topic for my dissertation is: testing the weak-form
efficiency of Vietnamese stock market, case of Ho Chi Minh Stock Exchange. 2006-2010. Two
periods are pre-crisis and crisis was included in this research.

1.2 Background and objective

The study into market efficiency has elicited increased interest amongst financial researchers. A
market is defined as efficient if all the available information is reflected in the prices. There are
three type of market efficiency: strong market efficiency, semi-strong market efficiency and
weak market efficiency. Financial analysts seem to have concentrated in the study of weak form
market efficiency. There are numerous factors that affect market prices, an understanding of
which would enable market participants to seize opportunities for investments and arbitrages.
This is because most markets in the world do not exhibit the strong and semi strong forms of
efficiency but display different degree of the weak form of market efficiency (Fama 1970).

The Vietnamese Stock Market has only been in existence for a little over a decade, and yet it is
ranked 24th in the world according to the VN index. This is remarkable growth for such an
adolescent market. During the past decade, this stock market has grown significantly, beginning
has only two companies and now with 258 companies listed on the Ho Chi Minh Stock
Exchange and 328 companies listed on the Hanoi Stock Exchange. (USA Today, 2010) More
researchers need to take not of these aforementioned monumental successes in the Vietnam
Stock Market. Potential investors would more than likely invest in this gold mine if only they
had all of the information. Because of this tremendous growth, the following is an analysis of

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this market, specifically, the Ho Chi Minh Stock Exchange. This research seeks to see if the
evidence point to Vietnam Stock Market is, through 2006-2010 is a week-form efficiency.

1.3 Research methodology

The problem background of this dissertation is whether the Vietnamese market exhibits weak
form of market efficiency. This dissertation aims at establishing a better understanding of the
Vietnamese stock market.

Testing random walk hypothesis as a first proposition of weak-form efficiency, secondly the
Variable Length Moving Average rules (VMA) and Variable Length Moving Average rules
(FMA) will be used to test whether future movement of stock prices can be forecasted and
profitability exploited. Data obtained from States Securities Committee of Vietnam.

1.4 Outline

The thesis consists in 6 chapters, Chapter 1 deals with an introduction to the paper which states
the objective and methodology of study. It also provide brief outline of thesis. Chapter 2 is
devoted an overview of the Vietnamese stock market. This covers the development of the
market, the characteristics of the market and the ownership structure of the market. Chapter 3
presented the Theoretical Framework and Literature reviews of empirical evidence in EMH field
include all three forms, but focus on weak-form efficiency. In Chapter 4 provides a data and
research methodology. An overview of the methodology will be provided as well as the
statistical explanation of the data. Report and analyze results from empirical tests will be
presented in Chapter 5. Conclusion from findings of study in Chapter 6

Chapter II. OVERVIEW OF VIETNAM STOCK MARKET

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2.1 Overview

Vietnam is classified as a developing country with a population of an estimated 86 million

people. The country‘s economy was been transformed into a capital market in the late eighties
from a planned economy. The Vietnam stock market was established in 2000 in Ho Chi Minh
City with an intention to speed the capitalization of the country. The establishment of the market
had been a major step made by the government towards the development of a public security
market. In 1993, the government set a special committee that was tasked with the responsibility
of conducting research and the preparation of strategic plan towards the creation of the stock
market. The State Securities Commission (SSC) is a government body charged with the
responsibility of establishing laws, organization and supervising the stock market. as at the first
day of trading the company had only two listed companies 247 companies being listed in 2010
with an overall capitalization of $ 28.28 billion(VND537.4 trillion). The market limits the
foreign ownership of listed companies to 49%. This capitalization represents a very small
percentage of the total GDP of the country making it one of the smallest economies in southern
Asia which has some of its countries recording their average capitalization that equated to up to
130% of their GDP. However, the market has recorded a remarkable growth that can also be
exhibited by the continued economic growth of the country.

At first the growth was slow, but had a boom in the market value and the number of companies
listed, resulting in Vietnam officially becoming the 150th member of the WTO by 2006. By
2007, the market increased to more that 1000 points. Moreover, their listed companies had
grown to a whopping 400. Trouble came in 2008, however, as it did with nearly all economies
throughout the world. Farber et al (2006) claimed that there are a number of factors that directly
or indirectly had an impact on the market; namely clusters of limit-hits, the effect of financial
policies, and the limit of information transparency. This is often referred to as the ―herd effect,‖
and has been a serious challenge to not only the Vietnamese market, but to nearly every market.
Nonetheless, the Consumer Price Index (CPI) was increasing, and peaked in 2008 at 19.89%.
(QDND.vn, 2009)

The Vietnamese stock market has had great growth and great challenges over ten years.
However, Yen and Tran (2009) believe that investors, especially foreign investors, lack enough
information about the development of the Vietnam Stock Market, as mentioned above. There
simply have not been sufficient empirical studies on this market.

2.2 Background of Vietnamese stock market

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 Not alike with development stock market in other countries where unofficial market and
OTC market existed for a certain period before stock exchange officially started, there was no
such of informal market like OTC in Vietnam before establishment stock exchange in 2000. The
established of stock exchange based on government‘s awareness of necessity for development
capital market.

2.2.1 The shareholding reforms

The development of the Vietnamese stock market was unlike other markets that had the
previous unorganized markets or Over the Counter markets. It was a government initiative
having realized the need for the market for the development of capital markets and the economy
long periods of subsidization characterize the war torn country as at 1975. Numerous State
Owned Organizations were established during the post war period while the privately owned
companies were restricted. The launch of the Doi Moi reforms, in 1985, was a government‘s
move aimed at reviving the sick economic conditions of the country. These reforms were led to
encourage private investment and foreign direct investment. These would be the heart beat into
the revival of the ailing economy. The state owned corporations were mostly inefficient in
comparison to the privately owned enterprises, hence, could not compete effectively. This
disparity coupled with the need to have several joint-stock companies led to the development of
the stock market. New legislations were issued by the government dealing with the equitization
of State owned Enterprises into Joint stock companies. The equitization legislations, formed in
1998 stipulate the methods for the selection and valuation of SOEs for equitization.

Vietnam government studied model from neighbour is China in management foreign enterprises.
For example, investments in banking sector are welcomed but government remain 51%
controlling stake. Besides, essential areas are electricity production, mineral exploration,
telecom and water supply. Private companies can be 100% foreign ownership but listed
companies on the market, it falls to 49%.

2.2.2 The Stock exchange

As mentioned previously, this section intent present the development process and market
features such as participants, listing and trading profiles, stock ownership structure. Ho Chi Minh
Securities Trading Centre (HOSTC) was established in July, 2000. Five years later, Hanoi
Securities Trading Centre (HASTC) was established on July, 2005, it was projected act as OTC
market while HOSTC operated as official stock exchange where listed companies or institution
are traded. In June, 2004, HoChiMinh index (or VN-INDEX) was 249.7 points, total market

10
capitalization accounted 3.4% of Gross Domestic Product (GDP). On May, 2007 , Ho Chi Minh
Securities trading Centre was converted to Ho Chi Minh stock exchange (HOSE), officially
established on 8th August, 2007.

Figure 1: Market Performance 2000-2011 VN-Index (cophieu68)

According to above figure, Vietnam‘s stock market has changed volatile in 11 years, from 2000-
2003, firstly, VN-Index grew up strongly, peaked 571 points on June 25th, 2001 and fell deeply
after that, 225 points on October 11th, 2001, one month later on November 15th , 2001, VN-
Index reach 296 points. However, VN-Index continues downtrend and got 131 points on October
26th, 2003. Second period 2004-2005, there is no fluctuate during this time, VN-Index between
215 points to 308 points (Feb 4th, 2004-Dec 28th , 2005). In 2006-2009 period, VN-Index reached
1158 points on March 12th 2007 before financial crisis, however, due the effects of financial
crisis, VN-Index was going down and had lowest point at 235 on Feb 24th 2009. 2010 until
September 2011, VN-Index between 400-550 points, in the end of 2011, VN-Index was falling
down and got 350 points on Dec 28th 2011.

In 2006, market has grown up impressively with a lot new listed companies, there are 154
companies listed on Hanoi Securities Trading Centre (HASTC) and 164 on HOSE. By the end of
2011, the number of listed companies was increasing to 699 companies, which were 306
companies in HOSE and 393 in HASTC (HOSE & HASTC, 2011).

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 2005 2011

Market capitalization (USD bn) 0.398 25

Average daily trading value (USD mn) 0.629 67.4

Listed securities 32 699

PE FY(VN-Index) 6.5 10.6

PE: Price/Earnings ratio; FY: Fiscal Year

Source: Data obtained from BIDV Securities www.bsc.com.vn

Table 1: Vietnam at a glance reported by Bloomberg

During the worst period, financial crisis (2008-2009), VN-Index fell to 230 points in March 2009
which was traded at 8x PE, companies keep growing. At the end of 2005, VN-Index got 307.5
points and still trade at 6.5 PE, companies have seen health earning growth despite of difficult
time. In 2011, PE increased to 10.6, however it still low when comparing to others market in
Asia (Bloomberg & VCSC, Sales commentary, 2011)

Relative Valuation PE FY2011

China CSI300 17.95

China Shanghai A shares 16.50

China HSI 14.68

India Sensex 18.42

Indonesia JCI 17.96

Malaysia FTSE Bursa 16.04

Philipines PSEi 14.90

South Korea Kospi 11.37

Taiwan Taiex 14.76

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Thailand SET 14.56

Vietnam VNI 10.6

Table 2: Relative valuation. Sources: Bloomberg (2011)

9%
24% 7%

Utilities
Consumer Services
Industrials
Consumer Goods

60%

Figure 2: Sector of listed companies in 2005(State Securities Commission www.ssc.gov.vn)

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Figure 3: Listed companies by sector (Stoxplus, 2011)

In 2005, there are total 32 listed companies and the largest sector is Industrials, next is Consumer
Goods. Industrials continue is a largest sector in 2011, but decrease to 42%, the pie become split
new sectors, especially Financials growing fast in 2011 when contribute 14% of total.

2.3 The structure and organization

This segment will discuss the Vietnamese stock market as regards the regulations and
functionality of the market.

2.3.1 The State securities commission (SSC) was established in 1996 and charged with the
responsibility of organizing, developing and supervising the country‘s stock market. From its
formation to 2004, the commission had operated as a branch of the prime minister. This created
structural weakness to the commission that inhibited it efficiency in the fulfillment of its
objectives. To resolve these weaknesses, the commission was handed over to the ministry of
finance. This was in a bid that the performance of the stock market would improve. The main
functions of the commission as stated in the Decree 90/2003/ND-CP are as follows.

1. Issuance, implementation and enforcement of guidelines and rules in the securities market.

2. Organization and management of stock trading centre‘s in the country.

3. Giving licenses to securities companies, advisors, security investment funds, depositories and
custodians.

4. Train specialized staff for the industry.

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 Derived from its roles, the commission is structures in eight departments namely, the
Securities Market Management, Human Resource, Supervision and Enhancement, International
Cooperation Legal Affairs, Securities Issuance Management, Planning and Finance and
Securities Business Management.

2.3.2 Securities Trading Centre (STC)

This is an organization controlled by the SSC and whose operational expenses are
covered by the government. This is an organization charged with the responsibility of
organizing, executing and supervision of all trading activities. The responsibilities and rights
have been stipulated in the decree 144/2003/ND-CP they include

1.Organization, management and supervision of trading securities.

2. Management of the securities trading system

3. Management and supervision of the listing of securities

4. Managing and supervision of information disclosure requirement by the listed companies.

5. Management and supervision of the centre‘s members.

6. Conducting information disclosures.

2.3.3 Securities companies

The securities are required to be developed by the limited liability or the Joint stock
companies. The main activities conducted by the security companies are brokerage, security
investment portfolios, owned trading, providing advisory on financial and securities investments
and underwriting. Licensed brokers or dealers are allowed to be members of the STC. This gives
the access to the trading system for the trading of securities. The fulfillment of the below listed
requirements is required for companies to be given a business license.

1. Possession of a business plan that is in synch with the socio-economic development

objective of the securities industry.

2. Possession of adequate technical facilities to conduct business.

3. Meeting the minimum capital requirement specified by law for each business activity.

Companies that wish to conduct more than one business activity must meet the

cumulative capital requirement for each of the business activities.

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 4. The directors and other practitioners should be qualified by the SSC, thus holders of a

practitioner certificate.

5. The qualification for an underwriting license is for the companies that have licenses for

owned dealing

2.3.4 Requirement for listing

The requirements placed by the government are aimed at ensuring the integrity and
credibility of the trading centre. The qualities of the listed companies are therefore crucial to
attain this level of integrity and credibility. These requirements are contained in the Decree
144/2003/ND-CP. For the listing of a company the following requirements should be met.

1. The company should be a joint stock company with a minimum capital requirement of

$0.32 million.

2. Having recorded profits for two consecutive years prior to the application for listing.

3. The board of management, board of Directors and the board of supervisors must make a

commitment to hold a 50% of the company‘s share capital for at least three years.

4. The least number of outside investors is 50 who must hold at least 20% of the company‘s

equity. For joint stock capital with share capital that exceeds VND100billion, a 15%

outside ownership can be applied.

5. The applicants for listing are required to submit to the SSC audited financial statements,

the management structure of the organization, charter of incorporation and the

prospectus.

Upon meeting the above listed requirement, the SSC is required to issue the firm with the license
within 45days. The qualification criteria for foreign invested companies are similar to those of
the joint stock companies.

Listing procedure

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The procedure to be taken for companies wishing to be listed in the stock market are contained in
the Decree 48/1998/ND-CP. The five steps are as listed below

Step 1: Organization of a Board of Directors‘ meeting

The purpose of this meeting is for the comparison of the current state of the company with the
listing requirement to ascertain if the company has met these requirements. It also seeks to pass a
listing policy. The aim of such a meeting is also to determine the issues to be discussed at the
shareholders meeting and the plan of the date of such a meeting.

Step 2: Organization of the shareholder‘s meeting

This meeting seeks to call for a vote decision on whether to offer the company‘s shares for
listing. Necessary decisions that relate to the common stock of the company are made to ensure
that the shares will be listed freely.

Step 3: preparation for the listing in the stock market.

This entails a preparation of the financial statements, valuation of the company, estimation of the
stock prices.

Preparation of the application documents and seeking the approval by the board of directors for
the planned listing.

Step 4: submission of the application to the SSC.

Upon the completion of the application documents, the SSC verifies the documents within 45
days from the receipt of such documents.

Step 5: Registration of the company for listing at the STC

Following such registration, the company is required to disclose all information as required by
the government. The company is also required to prepare its prospectus, submission of the
application documents and finally the listing of the company‘s shares at the centre.

2.3.5 Information disclosure

Firms listed in the stock market are required to disclose all information that has the
potential of influencing the investors‘ decisions. A full disclosure policy has been implemented
by the STC to ensure market integrity and transparency. Such information disclosure is
conducted through the bulletins of the STC or the mass media. The emphasis on information
disclosure has been laid due to the influence of such information to the prices of the stocks. The
information can be classified into regular or irregular information. Regular information requires
quarterly, semiannual or annual reporting of the financial statements. Upon the completion of the
preparation of audited financial statements, the company is required to disclose the financial

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statements in the local newspapers with ten days of completion. The quarterly and semiannual
reports are required within five days of completion, to be discloses in the STC bulletin.

Irregular information is information that happens randomly but is likely to affect the
investors‘ decisions. Such information may relate to, changes in the business activities of the
company, recording of losses that exceed 10% of the company‘s equity or changes in the
membership of the firm‘s management. Such information should be disclosed within 24 hours.

2.3.6 Trading

The trading of all listed companies is conducted at the STC via a computerized trading
system. There are two types of these systems namely, Put Through Trading and the Automatic
Order Matching. The automatic order matching is an entirely computerized process that is free
from human manipulation. Orders are matched in order of price and time. Automatic queuing
processes are made upon the receipt of the sell and buy orders. Orders are arranged according to
price and the time. The price at which an order trades is determined at 9.20am and at 10.30 am.
Put through Trading allows for the brokers to deal directly with each other. The price is
determined by the brokers. The results of such negotiations are expected to be filed with the
STC. The settlement on such dealings is made at the STC through the bank of investment and
development.

2.3.7 VNINDEX

The Vietnamese Stock Market Index is calculated as a composite index of all the prices of stocks
found in the STC. It is the weighted price index of the current prices for the stock compared to
those of the base year 28th July 2000.

The index is calculated using the following formula

VNINDEX= CMC/BMC*100=

Where

CMC-represents the current sum market capitalization of listed shares

BMC-represents total market capitalization of all shares in the base year.

Pit-represents the closing price at the trading session t for common share i.

Qit - represents the total number of outstanding common stock i at t.

Pio – represents the closing price of common stock I at the base year.

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Chapter III. THEORETICAL FRAMEWORK AND EMPIRICAL RESULTS
3.1 Efficient Market Hypothesis

Market efficiency is defined as the speed at which information is incorporated into the
prices of common shares. Thus it is defined in terms of the availability of information to market
participant and how this information is incorporated into the decision making process of the
investors. Thus, an efficient market is one where the prices adjust quickly to all the available
information. This type of efficiency is referred to as informational efficiency (Dimson and
Mussavian, 1998). The markets require economic agents and resources as they are economic
institutions. Efficiency in this economic view involves the allocation of resources to the most
cost effective and profitable markets. This is referred to allocative efficiency. Operational
efficiency refers to the ability of the market to provide liquidity, rapidly and at low costs (Sharpe,
1992). In comparison to capital market efficiency, a perfect market assumes that all market
participants have access to all information that is relevant to their decision making processes. It
also assumes that all participants act rationally to the information and that the market is
frictionless to the extent that there is no transaction costs, all products are divisible.

The inefficiency in developing countries‘ markets are caused by several factors among
them market regulation, size, costs of trading nature of the market participants such as the
investors (Dickinson and Muragu 1994).

Robert (1959) and Fama (1970) also introduced three commonly accepted levels of
efficiency: weak, semi-strong and strong, all dependent upon the flow of information. A market
is called weak if all information about past price movement is known and reflected in the current
stock price. This information is known as historical information and should not be useful in
predicting future changes of price nor is trend analysis possible. With weak form prices will
follow a random walk.

In-between strong and weak market efficiency are instances when information is released
privately just slightly before it is released publicly. This provides a slight advantage for some
over all other normal investors. Neither technical analysis nor fundamental analysis is effective
since they are based on public information. It also assumes that all information has already been
reflected in stock prices. A semi-strong efficient market assumes that public information is
reflected almost instantaneously and totally in the prices of stocks. It follows that since
predictive analysis is not possible in a semi weak efficient market therefore higher profits are
also not possible. If the market is semi-strong then it implies the weak form efficiency, the strong
efficiency, in addition, implies semi-strong and weak efficiency.

The last form of market efficiency is a strong form. This part of the hypothesis states that
all information (public or private) is mirrored in a stock price. In other words, an investor cannot
gain the advantage because all interested parties learn the news at the same time. Profits cannot

19
be made that exceed normal returns no matter the amount of information or research provided.
No forecast of future prices is possible.

The last level strong form which it is believed that all available information (including
insider information) is reflected in stock prices. Prices quickly adjust and investors cannot earn
excess returns (above competitive) using information. Forecasting is not possible.

Semi-strong form implies weak form, strong form implies semi-strong and weak form
efficiencies. It follows that if the weak form is capable of being rejected then both the semi-
strong and strong forms can also be rejected. (Campbell et al. 1997, 22; Fama 1970).

3.1.1 The development of Efficiency Market Hypothesis

EMH studies begun in the early twentieth century upon a empirical researches by Cowles (1933)
and the theoretical contribution by Bachelier (1900) and the the formulation of the random walk
for security prices by Samuelsson (1965). Early studies by various scholars carried out tests on
the random walk and concluded that successive prices variations are independent. These scholar
include Ball (1994), Cowles and Jones (1937), Cootner (1962), Kendall (1953), Fama (1965) and
Osborne (1962). The contributions by these scholars led to the formulation of the Efficient
Market Hypothesis (EMH).

EMH states that information efficient markets, it is impossible to forecast price

movements if the prices incorporate all the information available in the market. News is
randomly announced, hence, prices fluctuate randomly. Market participants are not able to
exploit insider information in the prediction of future prices for the individual stocks (Campbell,
et al. 1997). Fama later in 1970 formalized the theory by reviewing the theoretical and empirical
contributions on EMH. He stated that for a market to qualify as efficient it ought to reflect all the
information available. Fama (1970, p.35) and Findlay and Williams 2000 determined three
conditions that must prevail for a market to be efficient. These are absence of transaction costs,
availability of free information and that the current prices should fully reflect the all the current
information. These conditions ensure that not one participant has the ability to gain profits from
hoarded information. The prices of the stocks are representative of the intrinsic value of the
stocks. While investors tend to sell securities at a price that is believed to be higher than the
intrinsic value or buy at a value that is believed to be lower than the intrinsic value, in an
efficient market, the probability of gain is purely a game of chance as opposed to skill.

The developments in the formulation of the EMH by Fama led to further classification of
different levels of market efficiency. The difference in the three versions of market efficiency
being the meaning placed on ―all available information.‖

These are discussed below

3.1.2 Weak-form

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Prices in this market follow a random walk. The security prices reflect all forms of information
that can be derived from the study market trading data. These include a study into the trading
volume and past stock prices. The joint distribution of current stock prices already incorporates
the past price. A market that has weak form of efficiency cannot have chartering or technical
analysis as it is of no use since prices already reflect these past prices (Malkiel, 1996, p.197 and
Haugen 2001, p.575). Incorporating the random walk notion, Malkiel states that the best value
for any security is the present value plus/minus a random error variable.

The weak form of EMH is more relevant in developed markets rather than in less developed and
emerging stock markets (Mobarek and Keasey, 2000).

3.1.3 Semi-Strong Form (Haugen,2001 p.575).

Additional information on semi-strong form is the presumption that all publicly available
information has been reflected in the stock prices. The difference between semi-strong and
strong is the speed at which the prices adjust with respect to publicly available information. A
test would be to analyze whether the changes happened over a period of a few days or
immediately. Ergo, no published information helps in the selection of undervalued securities.
This type of study is referred to as event study (Fama 1969, p.388 and Shleifer, 2000).
Conducting a fundamental analysis and technical analysis on the securities is ineffective.
Published information cannot be used to select overvalued and undervalued securities.

There is no literature that rejects the weak and the semi strong theories

3.1.4 Strong Form

All information is reflected in stock prices, including private or inside information as well
as public information (Hagen, 2001:575). Strong form tests are not concerned with the full
reflection of information in the prices insofar as no individual can expect to receive higher
trading profits than others simply due to additional informational access (Coperland, Weston,
1993: 332). Thus the theory dismisses the benefits of insider information in an efficient market.
Once an analyst recognizes new information, it is quickly dispersed and almost immediately
reflected in market prices. It is important to know if all available information is totally reflected
in the stock prices because no one person can have an advantage due to personal access to some
information. (Fama, 1969:388). This theory postulates that at this form of efficiency even insider
trading is difficult to thrive. This is an extreme version that it is almost impossible to have.
While markets are not perfectly inefficient or perfectly efficient, investors tend to be believed
that their markets are efficient. However the different levels of industry analysis, technical and
fundamental are always conducted on security prices, thus bringing the paradox of EMH.

21
3.2 Empirical Evidence on Efficiency Market Hypothesis
Most of empirical researches on theory of efficient market hypothesis concern whether prices
―fully effect‖ a particular subset of information (Fama 1970). There have been extensive
researches done to determine the degree to which markets are efficient. Markets have been
described as not ever able to conform to the strong forms of EMH. Over the years only markets
of the developed countries have been considered for the study of efficiency. Over the recent
years researches into the market efficiency in developing countries have been made.

Especially, the empirical studies have been divided in test of weak-form, semi-strong and strong
form of market hypothesis.

3.2.1 Evidence from developed markets

Maria Borgers (2008) tested weak-form efficiency in 6 developed markets are France, Germany ,
UK, Greece, Portugal and Spain from 1993 to 2007 and found that returns and monthly prices
follow random walk. While Germany, France, Spain and UK meets almost the criteria with daily
data but rejected for Portugal and Greece due to serial positive correlation.

The evidence against market efficiency is that there is a positive correlation in stock returns,
specifically in the short run. There has been research recently on autocorrelation. This research
was in stock returns. (Engel and Morris 1991) When long run horizons were studied, the results
showed that there was found to be serial correlation that measured into the negative in the United
States. Fama and French (1988). Jose Benzinho et al.(2002) had examined the stock markets in
Portuguese (PSI-20) and Spanish (IBEX-35), used daily data from Jan 1993 to Sep 2001 for PSI-
20 and Oct 1990 to 2001 for IBEX-35 .The results provided an ambiguous evidence for random
walk hypothesis in Iberian peninsula stock markets, they pointed out the unit root test do not
reject the efficiency market hypothesis for two stock index while results from variance ratio tests
do. Poterba and Summers (1986) have examined in US and 17 other developed markets, they
found that positive serial correlation at short-term and negative serial correlation at long-term.

Lo and MacKinlay (1988) are pioneers in variance ratio test. Early empirical studies and
researches of the EMH had been primarily based on serial correlation and runs tests, while
modern tests of efficiency market have used variance ratio test Lo and MacKinlay studied 1216
weekly observations which were gleaned by Center for Research in Security Prices daily returns
from Sep 6, 1962 to Dec 26, 1985. Their resulting conclusions were also negative for sub
periods 608 weeks for returns indexes and size-sorted portfolios. Lo and Mckinlay (1988) found
that between weekly and monthly holding-period exist the positive serial correlation. In
opposite, French and Fama (1988) found the negative serial correlation for long-term period,
Fama and French (1988) reveal that long holding-period returns are substantially correlated
negative serially, indicate that 25 and 40 percent of the variation of longer-term return is indeed

22
predictable from past. Lo and MacKinlay (1988) found that the resulting evidence was against
the EMH in stock prices of small-firms, but not necessarily for large-firms

Lo and MacKinlay (1988) believe that the rejection of random walk hypothesis cannot fully be
explained. They contend that infrequent trading or time varying volatilities are not adequate
explanation, their conclusions are based on the behaviour of small stocks. Lo and MacKinlay
found out that a mean-reverting model of assert prices was not supported by the rejection of the
random walk for weekly returns. Lee (1992) used in variance ratio test in the examination of
whether stock returns of the U.S. and 10 industrialized countries: United Kingdom, Australia,
Canada, France, Belgium, Italy, Japan, Netherlands, Switzerland, and Germany follow a random
walk hypothesis for the period 1967- 1988. Choudhry (1994) examined the structure stochastic
of individual stock indexes in seven countries: the United States, the United Kingdom, France,
Germany, Japan, Canada, and Italy. The Augmented Dickey-Fuller (ADF) and unit root tests,
and Johansen‘s co-integration tests were applied to test of monthly stock indexes from 1953 to
1989. His findings reveal that seven stock markets are efficient during the sample period. Both
unit root tests results show that all seven series have a stochastic and they are non-stationary.
Johansen‘s method cointegration used to check for common stochastic trends among these stocks
index. All the results support for EMH, so there is additional evidence of finding for an efficient
market.

Chan et al. (1997) tested for the weak-form of 18 international stock markets (United States,
Australia, Belgium, Canada, Denmark, Finland, France, Germany, India, Italy, Japan,
Netherlands, Norway, Pakistan, Spain, Sweden, Switzerland, the United Kingdom) during period
January 1962 to December 1992 , with 384 monthly observations used Phillips-Peron (PP) unit
root and cointegration to test. They concluded that all sample stock markets were weak-form
efficient.

3.2.2 Evidence from Emerging Stock Markets

The growth of emerging markets were impressive, they‘re attract by their low correlation with
primary developed markets. Additionally, by the systematic patterns, they‘re more predictable
stock returns than developed markets. Abd Halim et al. (2010) examined 15 emerging markets
(Argentina, Brazil, Chile, Colombia, India, Jordan, South Korea, Malaysia, Mexico, Nigieria,
Pakistan, Philippines, Taiwan, Thailand, Zimbabwe) during the period 1985-2006 whether mean
reversion property hold. They applied a new panel stationarity developed tested by Carrion-i-
Silvestre et al.(2005) and panel unit root test by Im et al.(2005) to accommodate multiple break,
and the results show that stock prices follow a random walk process, and majority of stock prices
are governed by a mean reverting process. Then the past information is useful to predict the
future prices in the most markets.

Velimir Sonje et al. (2011) applies statistical test of autocorrelation of returns and moving
average crossover trading rule to test whether Croatian stock market(CROBEX) efficient as U.S

23
markets (S&P 500) in 2002-2010 period, the result due to impact of crisis period 2008-2009.
Velimir Sonje et al. (2011) analyzed autocorrelation of the daily frequencies which shows that
both markets are inefficient, however during the pre-crisis period; US market appears to be
efficient, while Croatian stock market is impossible to prove inefficient. SMA (Simple Moving
Average) crossover trading rule beat the CROBEX in 1997-2010 periods with more losses than
gains, the results shows that market is inefficient.

In Barnes (1986) study, he find out a high degree of efficiency in Kuala Lumper market, inspite
of thinness of the market while Laurence (1986) used runs test and autocorrelation to test two
stock market are Kuala Lumper and Singapore and concluded that bot markets are not weak-
form efficient.

According to Lim Kai Je et al. (2012), they used Jarque-Bera test, Ljung-Box Q test and non-
parametric runs test, ADF to test efficiency in Mongolian stock market over Jan 1999 to Jul 2012
and the results indicates Mongolian is not efficiency stock market. In Jarque-Bera test, the data
exhibits positive skewness and high level of excess kurtosis. They found evidence to against null
hypothesis of no autocorrelation in Ljung box Q and Runs test. In the final test random walk by
ADF and Chow-Denning Multiple Variance Ratio (MVR), the results reject null hypothesis and
evidence against random walk hypotheis even after adjust for heteroscedasticity in MVR test.

Chang et al. (1996) examined the weak form of the efficiency market hypothesis using monthly
data on the Taiwan stock market. They applied the Ljung-Box Q, runs and the unit root tests,
and found that is a weak-form efficient. Malaikah (1992) examined efficiency for the Kuwait and
Saudi Arabian stock markets; they used daily data stock returns of two stock markets for the time
period 1985 to 1989 by using the autocorrelation test. They found that that the Kuwait stock
market was efficient, but the Saudi Arabian market was not.

Miller et al. (1994) model suggests that returns should be adjusted in accordance with the results
found in the removal of the impact of thin trading, and a moving average model (MA) that
reflects the number of non trading days. There are many studies which used this model which
introduced by Miller et al. (1994). Antoniou et al. (1997) gathered the data from the daily stock
prices of the ISE Composite Index for the period 1988 to 1993 to examine the weak form
efficiency for the Istanbul Stock Exchange (ISE). Despite the improvement with adjusted returns,
they nonetheless found serial dependence in returns. The results conclusion points to the ISE as
being weakly inefficient.

Recently, Mustafa and Nishat (2007) found Karachi stock market is efficient. They also implied
thin trading and non-linearity which proposed by Miller et al. (1994) during Dec 1991-May 2003
period, with three non-overlapping periods (December 1991 to May 1998; May 1998 to
September 2011; and September 2001 to May 2003) and one combined period (May 1998 to
May 2003). In their study, they found that Karachi stock market is efficient for three sub-periods,
and combined one in linear and non-linear after adjustment for thin trading.

24
Howard Griffiths (2010) tested weak-form efficiency market hypothesis in S&P 500 and
Hangseng stock market by autocorrelation function test and runs test. The weekly data collected
from 2006-2010 which is sub-period is pre-crisis 2006-2008 and crisis period of 2008-2010. He
concluded that there are no systematic excess returns to be gained and two markets could not be
beaten consistently using trading rule.

Scott Niblock and Keith Sloan (2007) analysed based on daily data of Shanghai A, Shanghai B,
Shenzen A, Shenzen B during 2002-2005 period to test efficiency market hypothesis weak-form
in China. They used Serial coefficient tests, Runs test, Variance Ratio tests, and Granger
Causality They got the results which support that China‘s stock markets are not weak-form
efficient despite efforts by governemt in financial reform and improved regulation.

Saqib Nisar and Muhammad Hanif (2012) have examined the weak form efficiency in seven
stock markets in Asia-Pacific (Nikke N225-Japan, Shanghai Composite-China, Kospi-Korea,
Hangseng-Hong Kong, All Ordinaries ASX-Australia,KSE 100-Pakistan, and BSE SENEX-
India). They used daily, weekly, monthly for 14 years (June 1997-June 2011), and the
methodology applied are runs test and varicane ratio test. The results indicates three of out seven
stock markets not follow random walk hypothesis hence Nikke N225, Kospi, Hangseng, All
Ordinaries ASX are weak form efficient markets.

There have been a number of other studies concentrated in the emerging European markets. For
example, Hassan et al. (2006) tested efficiency in seven European as emerging stock markets
was employed by used International Finance Corporation‘s (IFC) weekly stock index data for the
period December 1988 through August 2002. They used different methods to test, include
Ljung-Box Q-statistic, runs, and variance ratio tests. According to their results, they found that
returns of Greece, Slovakia and Turkey are unstable over time, and conclude that Europe
emerging market overall are unpredictable

Smith and Ryoo (2003) used multiple variance ratio tests. They used weekly information and
data of index prices during period April 1991 to August 1998 to tests efficiency hypothesis in 5
markets are: Greece, Hungary, Poland, Portugal, and Turkey. They found that in four markets,
the random walk hypothesis is rejected because returns have autocorrelation errors. In Istanbul
stock market , it has higher turnover than others in 1990s, stock price follow by random walk.
Liquidity is greater in Istanbul than other markets in sample; hence Istanbul has active price
information process with important implication for weak form efficient.

Another study were investigated in Polish stock market by Marcin Kalinowski (2009) tested
semi-strong form efficiency market hypothesis in Polish stock market from the point of view in
2005-2008. He demonstrated the correlation between capital market prosperity and information
efficiency on this market. To prove the market influence semi-strong information efficiency, he
has research the level of fundamental analysis ratios P/E and P/BV and compare these ratio to
satisfactory ROI (Return on Investment). He got the results show that Polish market efficiency is

25
dependent on prosperity on financial market and even in crisis period, Polish stock market is
efficient.

We can conclude that developed markets even not completely consistent with efficiency market
but they are at least weak-form efficient, while cannot conclude like this for emerging markets.
This is expected because emerging markets are obviously less efficient than are developed
markets because of their infancy in the market and the lack of research for investors. While, the
developed markets have well-established institutions are characterized by high levels of trading
activity and liquidity, substantial market depth and low information asymmetry, amongst other
things.

3.3 Random walk

Markov explained that randomness refers to the unpredictability of a process even with the
analysis of past performance. According to Malkiel, the prices of tomorrow‘s prices only reflect
the news of tomorrow if information flow is uninterrupted. The flow of news is unpredictable.
Prices are also not predictable but random. (Malkiel, 1996 p.197). The random walk postulates
that security prices change randomly to the effect that investment returns are independent due to
the non dependence of current prices to previous prices. The probability distribution of stock
prices is constant over time (Malkiel, 1996 p.197). The random and the capital asset pricing
method (CAPM) are consistent about the equilibrium of the market. The two models postulate
that it is impossible to gain a superior performance from a security portfolio. The only chance
that an investor can outperform the market is by having a higher beta (Malkiel, 1996 p.254).
When the market is trending downwards, holding a portfolio with a higher beta is risky than
holding one with a lower beta. The semi strong form postulates that fundamental analysis is
useless while in the weak form, technical analysis is useless. Technical analysis looks into the
firm‘s foundation characteristics in an attempt to predict the intrinsic value of the stocks. An
investor conducting technical analysis study‘s and interprets the stock charts. The interest of the
investor is the past stock prices and their volume of trading in an attempt to determine the future
direction of the prices.

Investors continually look for accurate predictions of future stock prices in order to buy or sell at
the most advantageous times. This futile search goes against both technical (stock charts) and
fundamental (intrinsic value of stocks) analysis of the market. While chartists deal in 10 percent
logic and 90 percent psychological reasoning, fundamental analysts see the market in reverse
(Malkiel, 2006:117). Neither viewpoint can overcome the random walk theory that describes the
market with respect to predictions of future stock prices. Seasoned investors do not want to
believe that new investors will do as well as they based on the random walk theory and prefer
their own version non-random walk (against all research).

26
3.4 Technical trading rules
Technical analysis supposed that past trends in market can be used to predict the future stock
prices; therefore, technical analysis is the process of analyzing past prices and other statistics to
attempt the future price. Traders use these technical studies to establish target point for buy and
sell financial assets, whether to open or close trading positions. (Elder, 2002)

Assume that stock prices tend to move in trends for a long period and repeat itself is the key
point of technical analysis. Hence, technical analysis also known as chartist, they look at charting
and analyze the information as trend , low prices and historical high , a sensible forecast can be
made.

Edwards and Magee (1966), technical analysis assumptions follow by:

 The interaction of demand and supply determine market price of securities.

 Both rational and irrational governed demand and supply of securities.

 Shift in demand and supply are the result of reversal of trends

 Securities tend to move persist in trend for a long time period

 In charts, can detect any change in demand or supply of securities.

 Use of charts and key indicator to forecast market movements are essential for
developing tools of technical analysis.

EMH and Technical analysis are opposed each other, according to EMH, the market is always
efficient, impossible to consistently beat the market because prices reflect all available
information, but Technical analysis‘ assumption is traders can predict future trend based on past
prices. Thus , the acceptance and validity of one is meaning the rejection of other. There are
many researches which test efficiency by using Technical trading rules. Trading rule test
determine whether technical analysis can used buy and hold strategy. If trading rule test can help
investors earn abnormal profit of those earned buy and hold investment, market is inefficiency
and vice versa.

27
Chapter 4 DATA AND RESEARCH METHODOLOGY
4.1 Data

Data will be collected from HoChiMinh Stock Exchange (HOSE), daily, weekly return will be
computed. Daily returns will be used to test predictability of stock prices while weekly return to
test random walk hypothesis. Raw data i got from FPT Securities Company, all data in period of
2006-2010. Weekly data collected from Jan 2006-March 2010 which subcategorized pre-crisis
period of Jan 2006-Oct 2008 and crisis period of Oct 2008-March 2010. These returns are
analyzed based on the random walk theory and tested using autocorrelation function (ACF) to
investigate the returns predictability.

In order to test using technical data rules, daily return are required. Daily returns calculated in
natural logarithm of index for two trading days. As a requirement of technical trading rule test, a
series of non-overlapping 10 day returns will be computed Brock et al. (1992). The multi-day
returns allow comparing short-run and long-run effects. Variance ratios have been used in market
efficiency tests (Poterba and Summers 1988; Lo and MacKinlay 1988). Ten days returns (Rt) are
cumulative rates of return calculate for 10 days holding period:

Rt = ln(pt)-ln(pt-9)

The dividend yield of stocks is not included in computing the daily and weekly returns. The
reason for this exclusion is that dividend payments for companies listed at the stock market re
paid out semi annually. Hardouvelis et al. (1999) state that the extrapolation of the dividends to
the weekly and the daily returns produces as smoothening effect on the stock prices. This
increases the persistence and introduces a bias in VAR ratio tests that rejects the null hypothesis
of the random walk hypothesis.

4.2 Research approach

4.2.1. Deductive and Inductive

In business researches, building the research approaches following logical and clear ways
is one of the basic steps to ensure the researches‘ structure, and then achieve the researches‘
purposes. The two main approaches used in business researches are known as deductive and
inductive approaches. According to Burns and Burns (2008), inductive approach bases on the
process from specific descriptions or observations to develop theory. In contrast, deductive
reasoning will follow the test of a theory or hypothesis; and consequently, based on the basis of
results, the researchers can make conclusions that will support or reject that initial theory or

28
hypothesis. In the other words, inductive approach is a bottom-up process with an open-end
attribute. The nature of inductive reasoning is open-ended and exploratory, especially at the
beginning of the approach (Saunders et al., 2009). Specially, in inductive research, there is no
fixed structures construct in advance and assumptions about the relation of data are made without
any previous observation; conversely, deductive research has a fixed framework built on the
basis of mathematical analysis and logical explanation.

Based on these natures of the two approaches and the attribute of this piece of research,
this dissertation will follows a deductive research methodology in mind. That is because this
research will test the month of the year effect through a set of data from the two stock markets,
namely FTSE 350 index and VN Index. Therefore, testing theories by using statistical
descriptions and mathematical technique is obviously an example of deductive research.

4.2.2. Positivism and Interpretivism

As a matter of fact, this research is also performed under the viewpoint of positivism. As
defined by Coates and Sloan (2008), positive research is predominant in the field of science due
to its independence with human unpredictable behaviours, which enhances the reliability of the
research. Hence, beside quantitative methods, positive research methods, with the emphasis on
quantifiable data, becomes more and more popular.

As opposed to positivism, interpretivism holds different viewpoint. According to

interpretivists, natural and social sciences are dramatically distinguished, which then implies that
in social science, it is hardly to observe data to approve or negate theories; rather than, the data
need to be interpreted in order to achieve sound understanding of the results (Bryman, 2001)

In the view of interpretivists, scientific positive methods in doing research are oversimplified;
therefore, there is not enough data to draw thorough understanding about the complexity of
human behaviours. Taking these two methodologies into consideration, the author decide to use
mathematic and logic method on the basis of positivism to justify social theories.

4.2.3. Quantitative and Qualitative research

Referred to the requirements and needs of the researcher, quantitative and qualitative
research methodologies have both advantages and disadvantages due to different techniques used

29
in data collection and data analysis in each method. Quantitative approach emphasizes on the
development and collection of a set of valid data, the significance of which is then examined by a
variety of descriptive statistic analysis techniques (Cooper and Schindler, 2006; Robson, 2002;
Shields and Twycross, 2003). In the contrary, the focus of qualitative approach, which includes
phenomenology or ethnography strategies, is on the use of quasi-statistical data collection
techniques, template data analysis techniques, editing approaches and immersion approach,
which are distinguished with quantitative analytical tools (Cooper and Schindler, 2006; Robson,
2002; Shields and Twycross, 2003)

According to Firestone (1987, pp. 16), in the positive conception, quantitative research is
assumed to be able to explain behaviours via objective facts. As referred to the positive
philosophy and principles of deductive research methodology, the current study is believed to be
most properly executed in the light of quantitative methodology. Furthermore, the collected data
is the quantified and numeric data of the value of the Vietnam stock market. Lastly, this research
aims at testing different theories on a set of sample in order to generate a conclusion in larger
scope, which employs statistical experimental investigation, a property of quantitative
methodology.

4.3 Methodology
In this part, there are two approaches of random walk hypothesis will be employed to test
randomness: tests for stationary or non-stationary, and tests for serial correlation of time series.

4.3.1 Tests of Randomness

The literatures on random walk hypothesis present two approaches that can be used in
testing for randomness. These are the tests for stationarity/ nonstationarity and the tests for serial
correlation in a time series.
A time series is characterized by a stationarity process. The stochastic process is said to have
stationarity qualities if the mean, variances and co variances are constant over a period of time.
This property is known as time invariant. A non stationary time series arises when the time series
is not stationary where it has a time varying variance and a time varying mean (Gujarati, 2003).
This difference between stationary and nonstationary has a great influence in the determination
whether a time series is stochastic or deterministic. A deterministic trend in time series is
predictable and not variable. A stochastic trend is not predictable and has a nonstationary time
series. Therefore, stock prices are regarded s random if the prices change and should have
properties of the nonstationary process.
30
 If the time series has an independent structure, it is said to be random. This infers that if
the stock prices exhibit noncorrelation or independence, the prices are said to be random. Serial
correlation and relationship shows non randomness of the stock prices. The implication of this is
that stock prices depend on past returns. Stationarity and correlation tests address various degrees
of randomness.
Stationarity tests are conducted to determine the pattern of the time series whereas
correlation tests seek to detect relationship of present and past returns. The time span for this
particular study is between the year 2006 and 1020. Different elements of randomness will be
examined in order to have a comprehensive and reliable comparison about the conformity of the
Vietnamese market to weak form f market efficiency between the pre-crisis period and the post
crisis period. The following tests will be examined to evaluate the behavior of the Vietnamese
market.
1. Portmanteau test

2. Unit root test

3. Single variance ratio by Lo and Mackinley

Explanation of methods chosen

The most intuitive and direct reason for the random walk hypothesis on a time series is to
determine the serial correlation between two observable variables between different dates. The
portmanteau is also referred to as the autocorrelation tests. It measures serial correlation in a time
series. If the autocorrelation is zero, the time series will be deemed random. A simple statistic as
proposed by Ljung and Box is used on the data so as to tests the departure from zero. The test is
only strong when testing for linear correlation. It‘s impossible to use the test on non linear data.
This then means that tests that allow for non linear data such as the BDS test should be used
(Brock, Dechert and Scheinkman). If the results of the Ljung-Box reject the random hypothesis
thereby indicating linear dependence, it is unnecessary to conduct the BDS tests. However, if the
Ljung-Box test does not reject the hypothesis, the BDS test will then be conducted in order to
determine if the data has non-linear correlation.
The second test will be the unit test after serial dependence has been determined. This is
a stochastic/deterministic test. The importance of conducting the unit root tests is to determine if
the returns are stationary or not. The tests reveal if the pattern is stationary by exhibiting signs of
a polynomial time trend (Phillips and Peron, 1988). Portmanteau is related to the unit root
hypothesis whereby stationarity may reveal that the time series has a dependence structure. the
Phillips-Peron and Augmented Dickery and Fuller (ADF) tests will be used for the unit root
hypothesis. The rational for selecting the two tests is that they are strong in testing for different
market conditions. The Phillips- Peron test is particularly useful where the average errors are

31
positively moving. The ADF is robust for average errors that are moving negatively and the
serial correlation is also negative.
Lo and MacKinley‘s variance ratio test (LOMAC) is useful and powerful when testing
the behavior of stock price index on a non normal distribution. The weekly returns for this study
conform to the normality requirement since trading at the Vietnamese market for the periods
2006 and 2010 have been conducted on a daily basis. However majority of the stock market
exhibit heteroscedacity with regard to time. the LOMAC test is superior to all other tests as it
takes into consideration conditions of heteroscedacity in addition to homoscedacity. The use of
the three tests will most evidently produce a comprehensive conclusion into the level of
randomness in the Vietnamese stock market.

Portmanteau Tests
Ljung-Box test

One method of the random walk hypothesis is to determine all the autocorrelations equal to zero.
The prices will be said to follow the random walk is the stock returns are not correlated. The
following formula helps determine the degree of correlation or uncorrelation

-represents the stock return at time t and k represents the time lag. This value is calculated as
the natural logarithm of the stocks weekly returns of the index. The Q statistic is used to test that
all the autocorrelation coefficients equal to zero. The modified Q(m) statistic can also be applied
as it is a modification of the Ljung-box by Box and Pierce (1970). The formula is

Q(m)

m- Represents the time lags

T- Sample size

This formula is used to test for

i.

ii. Decision rule

32
 Reject Ho if Q (m) where represents the 100(1- percentile of a distribution
that is Chi-squared with m as the degree of freedom. A smaller number of m, the high
order autocorrelation may be missed while a large value of the same may render the test
less powerful as there is relatively high order autocorrelations (Campbell et al, 1997).
This is resolved by having the value of ) as this provides a better power
performance.

BDS Test

This test provides a powerful way of calculating the dependence on non-linear data. The test is
based on the IID (Independent and identical distribution) as the null hypothesis.

The formula is given as follows

= (
Let represents the time series for time T with observations embedded in a space that is M-
dimensional made by forming =
Where is the correlation integral.
(T – m+ 1) is the number of overlapping vectors formed by a time series for T length of time.
I(s) represents the indicator function that equals to 1 only if the sub norm| | or is equal
to zero.

Unit root test

Augmented Dickey-Fuller (ADF) Test

This test is used to determine the stationarity or the non stationarity of the data. This tests which
was proposed in 1984 by Said and Dickey as improvement to the DF test (1979). The 1979 DF
tests assume that the error term is uncorrelated while in the real world, the error term is likely to
be correlated. The ADF was brought forth to account for this limitation. This has been done by
adding the lagged dependent variable . The ADF is given by the following two regressions
1. This equation tests for the null hypothesis for a

mean stationary alternative of yi.

2. This equation this tests a null hypothesis

against which the trend stationarity alternative.

33
 ∆ is the first difference
Y(t ) is the logarithm of the stock price index.
Ε is the error term
T represents a deterministic time trend
K is the lag time is selected by the Akaike Information Criterion.
Null hypothesis Ho: (this would indicate that the time series is nonstationary or there
is the existence of a unit root in the series)
Alternative hypothesis H1
Ho is rejected if the ADF statistic has an absolute value that is larger than the critical value.
A greater negative value implies that the rejection is powerful the acceptance of the same
implies that the time series exhibits properties of random walk hypothesis.

Phillips-Perron (PP) test

This is an alternative parametric statistics unit root test that takes into consideration error
terms in a serial correlation but does not add a lagged difference term. This approach first
calculates he above test from a regression equation where the value of K is zero. The equation is
thereafter transformed so as to eliminate the effects of the serial correlation in an asymptotic
distribution. Although the test has the same power as the DF test, it allows for more general
classifications of errors. Using the Phillips-Perron (PP) test, the null, the critical values and the
alternative hypotheses are identical to those in the ADF test.

Variance Ratio test

This was forwarded by Lo and MacKinley in 1988. This test is founded on the notion that for the
random walk hypothesis, a series of incremental asset price is serially uncorrelated. It also
proposes that the variance of the random walk for a finite sample is linear for the sampled
interval. If the natural logarithm of the series is purely a random walk, the variance of the
differences of must grow in proportion with the growth in the difference of q. this is to mean that
if a time series (nq+ 1) for observations , , …….., with an equal interval, the variance q
( )=( .)
Only one test has been provided by Lo and MacKinley to be used in the testing of this
hypothesis using the single variance test that is denoted by .
The formula is defined as follows

34
Where q denotes the number of observations, is 1/qthe variance of q differences,
represents the variance of the first difference.

Ho:

H1:

The alternative hypothesis indicates positive correlation whereas one that is negative implies a
negative correlation also known as the mean reversion. This test takes into consideration
homoskedastic and heteroskedastic.

1/(nq-1)

)=

Where )

And m=q(nq-q+1){1- q/nq)

The standard Z statistic test

Z(q)=VR(q) N(0,1) this equation is used on the assumption of homoscedacity

/3q (nq)

. Under the assumption of heteroscedacity, the adjusted formula is

Z*(q)
=VR(q) N(0,1)

This modified formula is said to take into account an asymptotic distribution where the variance
test has a better chance of behaving better than the other forms of Portmanteau and ADF tests.

4.3.2 Tests of Technical analysis

There are various trading rules that can be tested in this study. The effectiveness of
academic researches depends on the implementation of moving averages, filters, momentum,

35
residence rules and support. For this dissertation the moving average oscillator will be chosen as
the method for analysis (Brock et al, 1992). The rational for this selection is that this technique is
consistent. The versions for this analysis technique include the Variable Length Moving Average
(VMA) and the Fixed Length Moving Average (FMA). A moving average simply refers to the
recursive but dated average of past prices. The moving averages yield insight into the underlying
trend of the series in addition to smoothening of the volatility. The moving averages under
consideration are those of the short run and long run price indices. A comparison of the short run
and long run moving averages, there is the generation of the buy and sell signals. The decision
rule is that a buy decision is reached when the short run average is above the long run average
while a sell decision is if the short run average is lower that the long run average (Brock, et al,
1992, p 1735). The short run moving average of an order with n observations is given by

The long run average is given by

Where n is less than m. This means that n has a slower MA in terms of adaptation and
the smoothening of volatility. The 1-2—is the most common average rule with a days short run
and 200 as the long run. There are other rules such as 1-50, 1-150, 5-150 or 2-200. E adjustments
on the trading rule can be adjusted by adding a percent. The effect of this adjustment is that it
eliminates the whiplash thereby reducing the number of sell or buy signals. The inclusion of
certain percent bands the buy or sell signals are initiated if .

For example, a buy signal is evident if

while a sell signal is generated if

Having considered the trading rules, when the signal is generated, buy or sell, the VA rule
requires that a position be maintained until the long and short moving averages cross again while
disregarding the time difference between the opposite signals. The FMA rule holds that the
position be held for a fixed number of days where signal emerging from that day should be
ignored. This forms the difference between FMA and VMA.

When testing for the hypothesis of equality between the returns obtained from using the
moving average rule and the buy-hold strategy, the following tests will be used. The mean
36
returns for each period will be computed separately. These mean values will then be examined
using the t-statistic.

t-statistic=( – /(

where - represent the mean return

- represents the number of buy and sell signals

-represents the unconditional mean

N- number of observations

–variance for the whole sample

The t-statistic for the difference for the mean returns is given by

– /( )

Chapter V. EMPIRICAL RESULT AND ANALYSIS

In this section, the empirical results will be separated into period are Pre-Crisis period of 2006-
2008 and Crisis period of 2008-2010 and following by three kinds of test which examine random
walk hypothesis: Autocorrelation test, Unit root test, Variance test and Technical analysis.

According to Malkiel (2011), due to influence by financial crisis, liquidity of market, public
information during this period must be different pre-crisis, conduct to EMH validity during pre-
crisis and crisis period is differ.

5.1 TEST OF RANDOM WALK HYPOTHESIS

5.1.1. Autocorrelation test

The null and alternative hypothesis is formed as:

H0: no autocorrelation exist in data

H1: autocorrelation exist in data

The autocorrelation test performed on the VN-Index and four stock markets has been performed
with lags. The results are summarized table 4. Table presents the correlation coefficients for the
post crisis period. It can be observed that the coefficients of the weekly VN-Index returns have a
positive sign from the 1st to 5th lags. According to the null hypothesis, at a significance level of
37
1%, it is evident that the index returns for all the lags has been rejected. For the four stock
considered in the analysis, it is noted that that the weekly returns have significant autocorrelation
coefficients. However, the q statistics fail to show that the market sampled support the null
hypothesis for all the lags. The random walk has been rejected under the autocorrelation tests for
the index and the four stocks

2006-2008 2008-2010
AC Q-Stat. AC Q-Stat.
1 0.328 24.554 0.089 70.685
2 0.25 38.905 -0.013 70.725
3 0.155 44.434 0.098 72.993
4 0.206 54.28 -0.077 74.391
5 0.239 67.54 0.069 75.516
6 0.075 68.838 0.031 75.741

Table 3: Autocorrelation test results

As the table above presented the Ljung-Box show that four lags are all significant at 5% level.
Therefore, null hypothesis of no autocorrelation is rejected, conducting that autocorrelations
exist in weekly return series. According previous section, Ljung-Box is very strong to detect
linear dependence of time series data, so with this result, Vietnam stock market is characterized
by linear dependence, and we do not need to have BDS test of non-linear dependence.

5.1.2 Unit root test

Both ADF and Phillip-Peron test used to test for unit root in weekly series data. Null and
alternative hypothesis are:

H0: Unit root test exist in data (nonstationary)

H1:Unit root test does not exist in data (starionary)

38
 2006-2008 2008-2010

p-value 1.201207** 1.436127**

9,0284E-41 3.3751E-30

Table 4: Unit root test results

The unit run tests are then conducted and provide the results as given in the in table 4. This test is
more powerful when compared to the autocorrelation tests as it is nonparametric. This is because
the time series observed does not follow a normal distribution. The tests also reject the null
hypothesis for the VN-Index. Alternatively the p-value for the index as shown below also rejects
the null hypothesis of a random walk.

5.1.3 Variance Ratio test

Under LOMAC test which proposed by Lo and MacKinlay (1988), null and alternative
hypotheses are:

H0: VR (q)=1 Return follow a random walk

H1: VR(q)≠1 Return does not follow a random walk

VR(q) and z-statistic under homoskedasticity and heteroskedasticity conditions presented below
table:

Variables obs. Nq 2 4 8 16 32
VNINDEX 224
VR(q) 0.56 0.3 0.2 0.1 0.06
Z(q) -6.56 -5.59 -4.05 -3.05 -2.21
Z*(Qq -2.92 -2.8 -2.19 -1.71 -1.39

Table 5: Variance ratio for the weekly return on the data 2006 to 2010

The homoscedacity and heteroscedacity have been tested for the null hypothesis in the variance
ratio test. The test has been applied for q intervals of 2, 4, 8, 16 and 32.

39
 Variables obs. Nq 2 4 8 16 32
VNINDEX 224
VR(q) 0.41 0.22 0.14 0.06 0.04
Z(q) -8.82 -6.24 -4.35 -3.18 -2.25
Z*(Qq -3.33 -2.69 -2.08 -1.63 -1.32

Table 5.1: Variance ratio for the weekly return on the data 2008 to 2010

From the result performed in table 5 , null hypothesis of a random walk can be rejected at 5%
significance level for studied sample. Variance ratio is more than 1 for all cases, Lo and
MacKinlay (1988) suggested variance ratio equal to 1 plus first order autocorrelation coefficient
weekly returns. Therefore, variance ratio are bigger than one, it point out positive autocorrelation
for weekly holding period returns. Both z(q) and z*(q) statistics increase with time interval that
significance of reject become stronger as raw sample variances are compared to weekly
variances.

Combine the results of three tests which performed above, Random walk hypothesis is strongly
rejected for Vietnam stock market. Further test in predictability of stock price should be
conducted to conclude whether rejection of random walk hypothesis is a result of market
inefficiency or not.

5.2 TEST OF TECHNICAL ANALYSIS

In this section, I applied tests which proposed by Brock et al. (1992): The VMA and the FMA—
the Variable Length Moving Average and the Fixed Length Moving Average. The moving
averages generated the result from trading strategies, in their research, to explore stochastic
properties of stock return, they used bootstrap techniques.

5.2.1 VMA Result

Table below shows results of VMA trading rules, which are differentiated according to band size
and short and long period lengths, for a full sample. The difference in the rules is in the duration
between the long and short period. The rules are stated such as (1, 50, 0). One represents the
shortest period, 50, the long period while 0 is the band in percentage form. For this dissertation,
10 rules will be used as in the table. The results should show results that emit sell or buy
decisions.

The returns of technical trading strategies are similar to unconditional returns of the buy-and-
hold strategy; since technical analysis cannot apply predict price changes. Moreover, it is

40
important to examine the days when returns from rules emitting buy signals are similar to returns
from rules sending sell signals.

Pre-Crisis

Test N(Buy) N(Sell) Buy Sell Buy>0 Sell>0 Buy-

Sell
(1,50,0) 543 561 0.003029 -0.001518 0.5856 0.3583 0.004546
(3.6716)* (-3.5912)* (6.2897)*
(1,50,0.01) 220 122 0.006446 -0.003878 0.6318 0.3115 0.010323
(5.5201)* (-3.6297)* (7.6173)*
(1,150,0) 568 536 0.002123 -0.000770 0.5317 0.4049 0.002894
(2.2669)* (-2.3547)* (4.0024)*
(1,150,0.01) 384 442 0.003008 -0.000825 0.5469 0.4027 0.003832
(3.0875)* (-2.1802)* (4.5754)*
(5,150,0) 572 532 0.001832 -0.000479 0.5262 0.4098 0.002311
1.8014 -1.8891 (3.1960)*
(5,150,0.01) 380 437 0.002735 -0.000358 0.5395 0.4233 0.003092
(2.7052)* -1.5117 (3.6720)*
(1,200,0) 570 534 0.001948 -0.000594 0.5316 0.4045 0.002543
(1.9869)* (-2.0737)* (3.5165)*
(1,200,0.01) 409 424 0.002490 -0.000789 0.5330 0.3797 0.003279
(2.4442)* (-2.1041)* (3.9404)*
(2,200,0) 569 535 0.001783 -0.000413 0.5272 0.4037 0.002196
1.7181 -1.7886 (3.0369)*
(2,200,0.01) 408 427 0.00253 -0.000643 0.5270 0.3841 0.002896
(2.1169)* (-1.9056)* (3.4846)*
Mean 0.002765 -0.001027 0.003791

Crisis

Test N(Buy) N(Sell) Buy Sell Buy>0 Sell>0 Buy-Sell

(1,50,0) 482 509 0.001029 -0.000985 0.3656 0.2497 0.003466
(3.2346)* (- (4.4757)*
2.9942)*
(1,50,0.01) 190 117 0.001123 -0.002769 0.5378 0.2265 0.001323
(5.2740)* (- (6.4753)*
3.7935)*
(1,150,0) 478 510 0.001123 -0.000460 0.3327 0.3950 0.001045
(2.0969)* (- (2.0147)*
2.9634)*

41
(1,150,0.01) 340 434 0.003008 -0.000735 0.4679 0.4027 0.002832
(3.0875)* (- (3.4724)*
2.2602)*
(5,150,0) 504 523 0.001832 -0.000545 0.3092 0.3584 0.001731
1.8014 -1.9521 (2.97960)*
(5,150,0.01) 367 420 0.002735 -0.000309 0.3749 0.3759 0.002452
(2.7052)* -1.6465 (3.24840)*
(1,200,0) 530 565 0.001948 -0.000693 0.3095 0.3584 0.001483
(1.9869)* (- (3.3467)*
2.0267)*
(1,200,0.01) 398 423 0.002490 -0.000662 0.3758 0.2759 0.002879
(2.4442)* (- (3.3854)*
2.2371)*
(2,200,0) 527 554 0.001783 -0.000372 0.3945 0.3573 0.002046
1.7181 -1.83639 (2.8469)*
(2,200,0.01) 396 415 0.00253 -0.000734 0.3570 0.2573 0.001945
(2.1169)* (- (3.1476)*
1.8452)*
Mean 0.001957 -0.002047 0.002747

Note: * Significant at 5% level

Returns are reported in daily. N(Buy) and N(sell) are numbers of buy and sell signal respectively
during the sample. Column 4 and 5 reported mean returns during buy and sell period with t-
statistics in parentheses. testing equality with unconditional mean. And column 8 depicts the
differences between the mean buy&sell returns with corresponding t-statistics testing buy-sell
difference from zero.

Table 6: Results of standard test VMA rules

Observing the Vietnamese stock market, there are VMA rules test results that indicate its
predictability. When one holds the index for a sample period, buy returns are positive and have
an average daily return of 0.276 percent in pre-crisis period while decrease to 0.195 percent
during crisis period. Compared to the mean daily return of 0.072 percent, the buy returns are
extremely high. Conversely, the sell returns have negative value with an average of -0.103
percent for ten tests; this shows a value of -23 percent for the annual rate. As Table 6 shows, the
differences between all of the returns, including unconditional returns, are very significant. Out
of twenty tests, fifteen rejected the null hypothesis, which states that buy-and-hold strategy
returns equal conditional VMA trading rules returns with a value of 5 percent significance in a
two-tailed test. On the other hand, other statistics indicate a small margin of significance.

To view the fraction of buy and sell returns, which are higher than 0, one must carefully inspect
the ―Buy>0‖ and ―Sell>0‖ columns. The value of the buy fraction for returns is typically more
than 50 percent; however, the value of the sell fraction for returns is usually less and between 31

42
and 42 percent. These two fractions should be equal because of the null hypothesis which
declares that technical trading rules are not useful in the production of signals. After conducting
a binomial test, the results of the test (shown in the last column) indicated that these different
values have great significance in the range of statistics between 3 and 7.6. Therefore, one can
easily reject the null hypothesis of equality.
Because buy-and-hold strategies differ from the returns of VMA rules, they provide varying
degrees of prediction. Unlike other research findings, which pinpointed significant negative
returns are twice as likely to occur as significant positive returns, this research explores the
opposite occurrence. Most notably, this research finds that the amount of positive returns from
buy signals is much higher than the amount of negative returns from sell signals. This finding
helps to prove that the technical trading rule is both sustainable and profitable and can be applied
to the Vietnamese stock market.

5.2.2 FMA results

Pre-Crisis

Test N(Buy) N(Sell) Buy Sell Buy>0 Sell>0 Buy-Sell

(1,50,0) 56 55 0.026738 -0.013302 0.6250 0.2727 0.0400
(2.5576)* (-2.5886)* (4.4567)*
(1,50,0.01) 22 13 0.061009 -0.039873 0.8182 0.1538 0.1009
(4.8992)* (-3.3714)* (6.0935)*
(1,150,0) 56 55 0.022080 -0.008559 0.5714 0.3273 0.0306
(1.9571)* (-1.9808)* (3.4103)*
(1,150,0.01) 39 46 0.032317 -0.008653 0.6667 0.2826 0.0410
(2.8853)* -1.8740 (3.9771)*
(5,150,0) 56 55 0.022080 -0.008559 0.5714 0.3273 0.0306
1.9571 (-1.9808)* (3.4103)*
(5,150,0.01) 38 44 0.031696 -0.006826 0.6579 0.2955 0.0385
(2.7877)* -1.6279 (3.6755)*
(1,200,0) 58 53 0.018753 -0.006074 0.5862 0.3019 0.0248
1.5459 -1.6418 (2.7606)*
(1,200,0.01) 41 43 0.029606 -0.007910 0.6585 0.3023 0.0375
(2.6254)* -1.7421 (3.6317)*
(2,200,0) 57 54 0.019027 -0.005903 0.5789 0.3148 0.0249
1.5726 -1.6304 (2.7739)*
(2,200,0.01) 40 44 0.028948 -0.006785 0.7000 0.3182 0.0357
(2.5264)* -1.6231 (3.3251)*
Mean 0.02755 -0.012844 0.0492

Crisis

43
Test N(Buy) N(Sell) Buy Sell Buy>0 Sell>0 Buy-Sell
(1,50,0) 46 50 0.015928 -0.010174 0.4058 0.1649 0.0309
(2.0376)* (-2.7473)* (4.2045)*
(1,50,0.01) 17 11 0.031009 -0.048753 0.6027 0.1305 0.0985
(3.9385)* (-3.54723)* (5.7849)*
(1,150,0) 54 51 0.010804 -0.009451 0.4028 0.3018 0.02048
(1.2475)* (-2.01759)* (3.1947)*
(1,150,0.01) 35 41 0.021347 -0.009365 0.5028 0.2204 0.0349
(2.2475)* -1.92759 (3.4857)*
(5,150,0) 58 52 0.014850 -0.0095739 0.4958 0.2947 0.0284
1.37485 (-2.0475)* (3.1947)*
(5,150,0.01) 34 42 0.011346 -0.008462 0.5038 0.2485 0.0240
(2.3475)* -1.8426 (3.3957)*
(1,200,0) 52 46 0.001847 -0.007372 0.4953 0.2648 0.0210
1.4957 -1.8265 (2.40583)*
(1,200,0.01) 37 41 0.021475 -0.008830 0.5840 0.2850 0.0296
(2.3583)* -1.9642 (3.4059)*
(2,200,0) 52 47 0.013847 -0.006829 0.5204 0.2905 0.01049
1.4759 -1.7271 (2.40690)*
(2,200,0.01) 36 41 0.019847 -0.008265 0.6970 0.2984 0.0204
(2.3485)* -1.7478 (3.1094)*
Mean 0.019474 -0.01593 0.0359
Note: * Significant at 5% level

Table 7: FMA results

According to FMA rules, cross short and long run triggered buy and sell signal , moving average.
After a 10-day holding period for post signals, one can calculate returns based on a cumulative
pattern. These results support similar conclusions gathered according to the rules of VMA.
Following a buy signal, the mean return for a 10-day holding period is equal to 2.152 percent
during pre-crisis period while in crisis period mean return is 1.592 percent. Next, following a sell
signal, the mean return for the same 10-day holding period is equal to -1.048 percent in pre-crisis
and -1.304 percent in crisis period. Compared to an unconditional cumulative rate of return of
0.405 percent for a 10-day holding period, the returns are quite different. At a 5 percent level of
confidence, 11 out of 22 tests of significance for buy and sell decisions are significant. Once
again, the number of significant negative returns of sell signals is less than the number of
significant positive returns of buy signals. Further, the number of buys greater than 0 is greater
than the number of sells greater than 0 in all of the test results. Observing the differences
between mean buy and sell returns, one can deduce a high level of significance concerning all
test statistics higher than 2.6. Given the aforementioned results, it is clear that the null hypothesis
of equality should be rejected.
Below are the summarized testing results for the VMA and FMA trading rules:

44
 i. For the VMA and FMA rules, the mean returns are quite different than the unconditional
returns created according to the buy-and-hold strategy. For VMA trading rules, it
appears that the mean buy-sell return is 5.2 times greater than the unconditional mean
return. Yet, for the FMA rules, the mean buy-sell return is 5.7 times greater than the
mean return (unconditional).

ii. According to moving average rules, sell signals are far less significant than buy signals.
This occurs as the amount of significantly positive buy signals goes beyond the
amount of significantly negative sell signals.

iii. For the studied period, these rules, which exclude transaction costs, are useful investment
tools that apply to the Vietnamese stork market.

The predictive ability of the two moving average trading rules is quite evident. Therefore, in the
Vietnamese market, technical analysis is very helpful in forecasting. Applying an efficient
market hypothesis in a costly environment, it is debatable whether or not trading rules translate
into abnormal returns. If one includes transaction costs, it is likely that abnormal returns caused
by using trading rules will diminish.
The combination of transaction cost magnitude and transaction number caused by buy and sells
signals affects the level of profits obtained from the aforementioned trading rules. A buy, sell, or
hold (no signal) happens when a short moving average takes over a long moving average. Thus,
until the moving averages intersect again, one records a transaction. Consequently, when a
transaction takes place, transaction costs, which include trading costs and income tax on capital
appreciation, incur. These two costs are considered small by the Vietnamese stock market.
Currently, Vietnam does not impose taxation on the trading of securities. As a result, the
exchange authority strictly regulates brokerage fees, and the Exchange varies brokerage fees to
increase stock market participation. During the given period of study, a range of 0.25 to 0.4
percent per transaction for the maximum was used to set up brokerage fees.
Upon observation, the combination of these two factors creates small trading costs per year.
Moreover, when comparing to the average annual return (buy or sell) between 60.55 and 65.76
percent, both VMA and FMA rules are followed closely. With these given factors, a conclusion
can be drawn, which declares that the two trading rules have predictive ability. Furthermore, on
the Vietnamese stock market, these trading rules serve as profitable investment tools for the time
period of Jan 2006 to March 2010.

5.3 Summary of test’s results

Two kinds of tests were selected in order to examine the predictability and random character of
data for an investigation of the Vietnamese stock market and its weak-form market efficiency
levels. Over a time period Jan 2006- March 2010, weekly stock returns were examined by
randomness testing for a full sample; over a sub-period , daily data was studied by predictability
testing. The portmanteau test for autocorrelations, Augmented Dickey-Fuller and Phillips-Perron
unit root tests, and the LOMAC variance test were the chosen tests for the measurement of
randomness for a weekly series of returns.

45
With these three chosen tests, one conclusively can reject the null hypothesis and confirm that
the Vietnamese stock market does not exemplify a random pattern. In particular, at four lags of
1, 5, 6, and 10, the portmanteau test‘s Ljung-Box statistics show high significance. This suggests
that weekly returns data on VN-Index is linear dependent. Moreover, according to the results of
the ADF and Phillips-Perron unit root test, one can easily reject the null hypothesis of the unit
root. This helps to propose that stationarity could explain the linear dependence of the time series
data, as exhibited by the initial test.

Lastly, the non-random character of the weekly returns series was demonstrated by the LOMAC
variance ratio test results. Since all of the variance ratios have values greater than 1, it can be
ascertained that the returns exhibit a positive serial correlation. Given this finding, for the
Vietnamese stock market, the random walk hypothesis does not hold, and the first condition for a
weak-form market efficiency designation is refuted. Due to the moving average empirical
results, it is shown that the Vietnamese stock market is quite ineffective. Further, VMA and
FMA rules pinpoint the predictability of changes stock price in Vietnamese stock market as well
as the exploitability of the net transaction costs. Accordingly, during the period of study,
empirical findings help one to conclude that the Vietnamese stock market is inefficient. This
finding is similar to previous studies on the efficiency of the market hypothesis in emerging and
developing markets.

Chapter VI CONCLUSIONS
This dissertation has detailed description into the Vietnamese market in an aim of determining if
the market has exhibited weak forms of efficiency in the periods before and after the crisis.

According the result from Ljung-Box test , ADF and Phillips Peron, LOMAC, the results
conclude that evidence exists against the hypothesis of an efficient market in weak form. The
rejection of the random walk hypothesis implies that the market in both periods pre-crisis and
post-crisis is inefficient in the weak form off market efficiency. Nevertheless, the reject of
random walk does not necessary imply market inefficiency so the technical analysis was applied
to test which used VMA and FMA. It presented the techniques used in Vietnam stock market had
predictive ability and helped generate significant return net of trading costs. Empirical evidence
from both of tests are enough to reject hypothesis Vietnam stock market efficiency in weak form.
Therefore, the hypothesis that the stock prices followed a random walk pattern based on the
weak efficient market theory was rejected and that there was a pattern in the price variations. The
rejection of the null hypothesis called for technical analysis to be conducted on the VNIndex to
exhaustively conclude that the market suffers from inefficiency in the weak form. The
predictability test also implies that the market is inefficient in the weak although the prices of
stocks are predictable. This has been a conclusion reached by several other researchers who have

46
conducted studies on emerging markets. This could be concluded by several reasons such as
thinning, low levels of liquidity, ill governance on the system, the irrational behaviour of
investors, insider trading and manipulation. The Variable Moving Average and the Fixed
Moving Average also reveal that the stock prices are predictable and generate substantial returns
at the lowest cost. The main sources of predictability are investor rationality and numerous
market imperfections. The application of the two tests rejects the null hypothesis which is
understandable as Vietnam is a relatively new market with a life of only 12 years since inception.

Finally, the stock prices in Vietnam market did not follow a random pattern, and the market was
not efficient in weak form for the last period, from Jan 03, 2006 to March 31, 2010.

Extension

It should be noted that the Vietnam market pays dividends in cash, stocks, or a combination of
cash and stocks. This study was directed at announcements of the cash dividend payments only.
It would be of interest to further investigate if announcements of dividend payments would also
be influential in the other two methods of payout.

Further investigations might combine both the Vietnam Stock Exchange along with the Hanoi
Trading Center in order to provide larger sample sizes. Another investigation could be the
examination based on seasons of the year, or possible monthly effects to note if they also
indicate statistical connectivity.

This data might also be analyzed to determine a clearer picture for future price movements in the
Vietnam Market.

47
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