The Impact of Macroeconomic Variables on Equity Risk Premium: Evidence from Sectoral Analysis in Vietnam Using Bounds Testing Approach
Main Article Content
Abstract
This study investigates the impact of change of macroeconomic variables on equity risk premium of Ho Chi Minh stock market and some important sectors for period January 2007- September 2015. The paper applies bounds testing approach to cointegration to find the long run and short run relationships. The results show that there are long run relationships between equity risk premium for both market and sectoral analysis with some selected macroeconomic variables. In the long run, inflation rate exert negative impact on excess returns except for the financial sector. However, in the short run, an increase in exchange rate volatility significantly reduces equity risk premium of market and all sectors. These findings shed some light for monetary authorities to implement monetary policy.
Article Details
Keywords
Equity risk premium, Bounds testing approach, Cointegration, Macroeconomic variables, Vietnam
References
REFERENCES
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28. Nguyen T. T. V., 2015, “The Role of Different Channels in Transmitting Monetary Policy into Output and Price in Vietnam,” Journal of Economics and Development, Vol. 17, No.1, April 2015, pp. 20-40.
29. Nucu, A. E., 2011, “The Relationship between Exchange Rate and Key Macroeconomic Indicators. Case Study: Romania.” Romanian Economic Journal, Vol 41, pp. 127-145.
30. Pesaran, M. H., Yongcheol, S., and Richard J. S., 2001, “Bounds Testing Approaches to the Analysis of Level Relationships,” Journal of Applied Econometrics, Vol 16 (3), pp. 289–326.
31. Ross, S. A., 1976, The Arbitrage Theory of Capital Asset Pricing, Journal of Economic Theory, Vol. 13, pp. 341-360
32. Reddy, L. D., 2012, “Impact of Inflation and GDP on Stock Market Returns in India,” International Journal of Advanced Research in Management and Social Sciences, Vol. 1 (6), pp 1-17.
33. Sharpe, S. A., 2002, “Reexamining Stock Valuation and ainflation: The implications of Analyst’s Earning Forecast,” Finance and Economic Discussion Series, Vol. 84(No. 4), pp. 632-648. Board of Governors of the Federal Reserve System (U.S),
34. Sharpe, W. F., 1964, “Capital Asset Prices: A Theory of Market equilibrium Under Conditions of Risk,” Journal of Finance, vol. 19 (3), pp. 425-442.
1. Adarmola, A. O., 2012, “Exchange Rate Volatilty and Stock Market Behavior: The Nigerian Experience”, Research Journal of Finance and Accounting, Vol. 3(No. 3).
2. Ahmed, E. M. A., 2011, “The long run relationship between money supply, real GDP, 186 and price level: Empirical evidence from Sudan”, Journal of Business Studies Quarterly, 2(2), pp. 68-79.
3. Adjasi, C., Harvey, S. K., & Agyapong, D., 2008, “Effect of exchange rate volatility on Ghana Stock Exchange,” African Journal of Accounting, Economics, Finance and Banking research, 3(3), pp. 28-47.
4. Apergis, N., Artikis, G. and Eleftheriou, S., 2011, “The role of macroeconomic factors for excess returns: Evidence from a group of emerging economies”, Journal of Accounting, Finance and Economics, Vol. 1. No. 2. December 2011. pp. 1 -12.
5. Aurangzeb., 2012, “Factors Affecting performance of Stock Markets:Evidence from South Asian Countries,” International Journal of Academic Research in Business and Social Sciences, Vol 2(No 9).
6. Bassam, AbuAl-Foul., 2010, “The Causal Relation between Savings and Economic Growth: Some Evidence from MENA Countries”, The 30th MEEA Meeting, Atlanta.
7. Becher, D. A., Jensen, R. G., and Mercer, J. M., 2008, “Monetary policy indicators as Predictor of stock returns,” The Journal of Financial Research, No 31(4), pp.357379.
8. Bilson, C.M., T.J. Brailsford and V.J. Hooper, 2001, “Selecting macroeconomic variables as explanatory factors of emerging stock market returns”, Pacific-Basin Finance Journal, No 9, pp. 401-426.
9. Bordo, M. D., Dueker, M. J., & Wheelock, D. C., 2008, “Inflation, Monetary Policy and Stock Market Conditions: Quontitative Evidence from a Hybrid Latent-Variable VAR,” Working Paper Series, Federal Reserve Bank of St. Louis
10. Claessens, S., S. Dasgupta and J. Glen., 1993, “Return behavior in emerging stock markets,” World Bank Economic Review, No 9, pp. 131-152.
11. Damodoran, A., 2012, “Equity Risk Premium (ERP): Determinants, Estimation and Implications,” Working paper, Stern School of Business
12. Diaz, A., and Jareno, F., 2009, “Explanatory Factors of the Inflation News Impact on Stock Returns by Sector: The Spanish Case,” Research in International Business and Finance, Vol 23, pp. 349–368.
13. Dovern, J., and Welsser, J., 2011, “Accuracy, unbiasedness and efficiency of professional macroeconomic forecasters: An empirical comparison of the G7,”
International Journal of Forecasting, No 27, pp. 452-465.
14. Ghorbani, M., and M. Motallebi., 2009, “Application Pesaran and Shin Method for Estimating Irans` Import Demand Function,” Journal of Applied Science, No 9 (6), pp. 1175-1179.
15. Harvey, C.R., 1995, “Predictable risk and return in emerging markets,” Review of Financial Studies, No 8, pp. 773-816.
16. Hussainey, K., and Ngoc, L. K., 2009, “The Impact of Macroeconomic Indicators on Vietnamese Stock Prices”, The Journal of Risk Finance, Vol. 10 No. 4, pp. 321-332.
17. Jain, A., Narayan, P.K., and Thomson, D., 2011, “The relationship between exchange rates, interest rates and Australian bank returns,” Applied Economics Letters, Vol 18 (10), pp. 967-972.
18. Jamil, M., & Ullah, N., 2013, “Impact of Foreign Exchange Rates on Stock Prices,” IOSR Journal of Business and Management, Vol 7(No. 3), 45-51.
19. Johnson, R., & Soenen, L., 1998, “Stock Prices and Exchange Rates: Empirical Evidence from the Pacific Basin,” Journal of Asian Business, Vol 14(2), pp. 1-18.
20. Kimani, D.K., & Mutuku, C.M., 2013, “Inflation dynamics on the overall stock market performance: The case of Nairobi securities exchange in Kenya,” Economics and Finance Review, Vol 2(11), pp.1–11.
21. Khaled, H., Le, K N., 2009, “The impact of macroeconomic indicators on Vietnamese stock prices,” The Journal of Risk Finance, Vol. 10 (4), pp. 321 – 332.
22. Lintner, J., 1965, “Security Prices, Risk, and Maximal Gains from Diversification,” Journal of Finance, Vol. 20 (4), pp. 587-615
23. Maitra, W.K., and Mukhopadhyay, K.C., 2011, “Causal relation between money supply and exchange rate in India under the basket peg and market determination regimes: A time series analysis,” The IUP Journal of Applied Economics, Vol 10 (2), pp. 40-56
24. Mishra, K.A., 2004, “Stock market and foreign exchange market in India: Are they related?,” South Asia Economic Journal 5 (2), pp. 209-232.
25. Mittal, R., and Pal, K., 2011, “Impact of Macroeconomic Indicators on Indian Capital Markets,” The Journal of Risk Finance, Vol. 12 No. 2, pp. 84-97
26. Morley, B., and Pentecost, E.J., 2000, “Common Trends and Cycles in G-7 Countries Exchange Rates and Stock Prices,” Applied Economics Letters, Vol 7 (1), pp. 7-10.
27. Nieh, C.C., and Lee, C.F., 2001, “Dynamic relationship between stock prices and exchange rates for G-7 Countries,” The Quarterly Review of Economics and Finance, Vol 41, pp. 477–90.
28. Nguyen T. T. V., 2015, “The Role of Different Channels in Transmitting Monetary Policy into Output and Price in Vietnam,” Journal of Economics and Development, Vol. 17, No.1, April 2015, pp. 20-40.
29. Nucu, A. E., 2011, “The Relationship between Exchange Rate and Key Macroeconomic Indicators. Case Study: Romania.” Romanian Economic Journal, Vol 41, pp. 127-145.
30. Pesaran, M. H., Yongcheol, S., and Richard J. S., 2001, “Bounds Testing Approaches to the Analysis of Level Relationships,” Journal of Applied Econometrics, Vol 16 (3), pp. 289–326.
31. Ross, S. A., 1976, The Arbitrage Theory of Capital Asset Pricing, Journal of Economic Theory, Vol. 13, pp. 341-360
32. Reddy, L. D., 2012, “Impact of Inflation and GDP on Stock Market Returns in India,” International Journal of Advanced Research in Management and Social Sciences, Vol. 1 (6), pp 1-17.
33. Sharpe, S. A., 2002, “Reexamining Stock Valuation and ainflation: The implications of Analyst’s Earning Forecast,” Finance and Economic Discussion Series, Vol. 84(No. 4), pp. 632-648. Board of Governors of the Federal Reserve System (U.S),
34. Sharpe, W. F., 1964, “Capital Asset Prices: A Theory of Market equilibrium Under Conditions of Risk,” Journal of Finance, vol. 19 (3), pp. 425-442.