VIETNAM NATIONAL UNIVERSITY – HO CHI MINH CITY INTERNATIONAL

UNIVERSITY
SCHOOL OF BUSINESS

Final report
Lecturer: Nguyen Phuong Anh

THE EFFECTS OF MACROECONOMIC

FACTORS ON STOCK PERFORMANCE

Student Name
Ngô Hạ Nhi
Trần Đình Khôi
Nguyễn Nguyên Hạnh
 Group Contribution

Name Tasks Contribution

Ngo Ha Nhi Run models, write report 100%
for results, conclusions, and
prepare slides
Tran Dinh Khoi Collect data, support run 100%
models, write report for
introduction, methodology
and prepare slides
Nguyen Nguyen Hanh write report for literature 100%
review, support collect data,
support run models, and
prepare slides
Table of Contents

CHAPTER I: INTRODUCTION ................................................................................................................4

1. CONTEXT.......................................................................................................................................4
2. RESEARCH RATIONAL ........................................................................................................................5
3. METHODOLOGY ..............................................................................................................................6
4. RESEARCH STRUCTURE ......................................................................................................................7

CHAPTER II: LITERATURE REVIEW .......................................................................................................7

1. DEFINITION OF STOCK RETURN ...........................................................................................................7

2. EMPIRICAL EVIDENCES OF THE RELATIONSHIP BETWEEN STOCK RETURN & MACRO FACTORS ...............................8
1. REASONS OF THE RELATIONSHIP..................................................................................................................... 8
2. THEORY OF RELATIONSHIP ............................................................................................................................ 8
3. FACTORS AFFECT STOCK RETURNS .................................................................................................................. 9

CHAPTER III: METHODOLOGY ........................................................................................................... 15

1. DATA COLLECTION ......................................................................................................................... 15

2. METHODOLOGY ............................................................................................................................ 15
A. ASSESS THE INFLUENCE OF MACRO FACTORS ON THE PERFORMANCE OF THE MANUFACTURING STOCK MARKET . .......15
B. ANALYZE THE EFFECT OF MACRO FACTORS ON THE PERFORMANCE OF EACH SECTOR 'S MANUFACTURING STOCK MARKET
17

CHAPER IV: RESULTS AND DISCUSSION ............................................................................................. 19

A. THE INFLUENCE OF MACRO FACTORS ON THE PERFORMANCE OF THE MANUFACTURING STOCK MARKET . ............. 19
1. POOL-OLS REGRESSION .............................................................................................................................19
2. OLS, FEM AND REM REGRESSION ..............................................................................................................22
3. COMPARATION OF OLS, FEM AND REM MODELS .........................................................................................27
B. THE EFFECT OF MACRO FACTORS ON THE PERFORMANCE OF EACH SECTOR'S MANUFACTURING STOCK MARKET .....29
1. DATA ANALYZES. .......................................................................................................................................29
2. APT MODEL: HIERARCHICAL LINEAR REGRESSION ..........................................................................................30

CHAPTER V: CONCLUSIONS............................................................................................................... 34

REFFERENCES ...................................................................................................................................36

CHAPTER I: INTRODUCTION
1. Context
Both developed and developing nations rely significantly on the stock market to facilitate
financial transactions. In addition, the stock market provides listed companies with long-term
funding by aggregating the funds of numerous investors and allowing them to expand their
businesses by providing investors with additional investment opportunities (Ologunde et al.,
2006). There is evidence that the relationship between macroeconomic factors and stock
performance is significant. Changes in macroeconomic factors have a wide range of economic
effects. According to the Economic Survey 2013 (GoK, 2013), the stock market's performance in
2012 increased. Several macro factors have contributed to this improved result. The NSE 20 Share
Index rose by 29.0% from 3,205 in December 2011 to 4,133 today. In addition, the annual inflation
rate decreased from 14.0% in 2011 to 9.4% in 2012 during the same time frame. Due to currency
devaluation, 2011 and 2012 were notably notable for the bullish participation of foreign investors
in the equity market, which accounted for an average of 45 percent of the total turnover.
Nonetheless, the stock market staged a revival during the second quarter of 2012, in part due to a
reduction in inflationary and exchange rate pressures. Capital Markets Authority (2012).

The effects of the COVID-19 pandemic in Vietnam are a recent illustration of this connection.
As a response to the pandemic-induced economic slowdown, the central bank (SBV) implemented
stringent monetary policies, which included lowering interest rates to previously unprecedented
lows. These initiatives supported stock markets and aided in the recovery of stock prices (mof,
2022). During the first quarter of 2020, the benchmark stock index for Vietnam, the VN-Index,
fell by more than 30 percent. However, following the implementation of the SBV's monetary
policies, it rebounded by more than 50 percent in the second quarter of 2020 (taichitaichinh, 2020).

Numerous studies conducted in emerging economies have also demonstrated a correlation

between macroeconomic factors and stock market performance. Naik (2013) examined the
relationships among the indices of industrial output, wholesale prices, money supply, Treasury bill
interest rates, and exchange rates and the Indian stock market index. Osamuonyi and Evbayiro-
Osagie examined the relationship between macroeconomic factors and the Nigerian capital market
index in their 2012 study. In their 2012 study, Ochieng and Oriwo investigated the relationship
between the performance of the Kenyan stock market and macroeconomic factors.

This study is based on Ross's (1976) arbitrage pricing theory (APT), which ties variations in
investment returns to unanticipated changes in a number of crucial value factors (Kettell, 2001).
Since the founding theory does not specify the range of these components, all investments within
the APT framework have "expected returns" and are affected by macroeconomic forces/factors.
APT posits that security results are impacted by an unknown number of unknown variables,
according to Alexander et al. (2001). The four main drivers, in accordance with Roll and Ross
(1980), are the unexpected shift in inflation, risk premiums, the terms structure of interest rates,
and industrial production. According to Husam Rjoub's 2009 study, the changeable unemployment
rate is also taken into consideration.

2. Research rational
Throughout the COVID-19 epidemic, market volatility and uncertainty increased.
Researchers can now analyze the interactions between extreme market conditions and
macroeconomic variables such as inflation, risk premiums, the terms of interest rates, the
unemployment rate, industrial production, and stock market performance.
 Vietnam was chosen for the correlation study between macroeconomic variables and stock
market performance for three main factors. Even though there is already research on the
Vietnamese stock market, there is still room for further investigation and analysis of the
relationship between macro conditions and stock performance, and none of this research was
conducted during the Covid-19 pandemic. Research in this area can contribute to the corpus of
knowledge and provide academics and businesses with insightful information. Secondly, Vietnam
has undergone significant economic transformations, shifting from a centrally planned to a market-
oriented economy. This action has affected macroeconomic variables and stock market dynamics,
allowing researchers to examine how these modifications have impacted stock performance
(Nguyen, Q. D., & Nguyen, H. T., 2018). Finally, during the previous ten years, the stock market
in Vietnam has also developed and grown significantly. The Ho Chi Minh Stock Exchange
(HOSE) and the Hanoi Stock Exchange (HNX) have been established, and the number of domestic
and international investors has increased, making the market more stable and conducive to research
(Nguyen, V. T., & Nguyen, N. V., 2009).

Since the manufacturing sector contributes considerably to the economy in Vietnam (GSO,
2021), it is imperative to investigate the link between poor corporate governance and the financial
difficulties faced by manufacturing businesses. As a result, this study contributes to our
comprehension of the relationship between macroeconomic variables and company performance
and provides investors and portfolio managers with guidance through an analysis of the
performance of the manufacturing stock market during the Covid-19 period.

3. Methodology
All 129 manufacturing companies listed on the Ho Chi Minh Stock Exchange (HOSE) are
surveyed for data from 2018 to 2021 as part of the Covid-19 epidemic. The macro determinants
are obtained from Eikons, and the stock returns are gathered using SBSC. Stock performance
includes macro factors such as inflation, risk premiums, the terms structure of interest rates, the
unemployment rate, and industrial production in the stock return.

This investigation is divided into two sections: (1) Assess the influence of macro factors on
the performance of the manufacturing stock market. (2) Analyze the effect of macro factors on the
performance of each sector's manufacturing stock market. In the first test, the OLS, FEM, and
REM models are used, and in the second test, the APT model known as Hierarchical Linear
Regression is used.

4. Research structure
The remaining portions of the paper are organized as follows. The literature review is
presented in the following Chapter, followed by the methodology in Chapter 3, the results and
discussion in Chapter 4, and the conclusions in Chapter 5.

CHAPTER II: LITERATURE REVIEW

1. Definition of Stock Return
Stock returns can be used to assess a company's stock performance. The firm's financial goal
is to maximize investment returns, which are represented in the change in company stock prices.
Stock returns are used for evaluating a company's financial success.

Ross et al. (2010), a return on stock traded in the financial markets is divided into two parts:
normal or expected returns, that depends on the data that shareholders had which holds on the
stock and rely on market comprehension of the significant variables that will affect the stock in
the upcoming year, as well as ambiguous and risky returns. This dangerous element stems from
unexpected facts presented throughout the year, such as profit warning announcements.

Sharp's (1964) capital asset pricing model applies the beta coefficient to explain stock returns
as an aspect of systematic risk. In contrast, the capital asset pricing model has been challenged
over the years for struggling to address stock returns. Some business features have been
demonstrated to be effective at explaining and forecasting stock returns. Size and Market-to-Book
ratios were discovered to be crucial factors in understanding cross-sectional stock returns by Fama
and French (1992).
 2. Empirical evidences of the relationship between stock return & macro factors
1. Reasons of the relationship
In Norway, Gjerde and Saettem (1999) investigated the relationship between stock returns and
macroeconomic factors. The findings revealed a positive correlation between the price of oil and
stock returns, as well as real economic activity and stock returns.
Liow (2004) examined the temporal variation of Singapore residential real estate over stock
returns using five macroeconomic variables and discovered that the anticipated risk premium for
real estate stock changes with the time and reliant volatilities in these macroeconomic factors.
Rapach et al. (2005) discovered that stock returns could be forecast by macro factors
(particularly interest rates) on information collected from 12 industrialized countries since the
1970s using a broad range of macro variables.
Chuang et al. (2007) investigated whether macroeconomic factors, specifically money supply
and fiscal deficit, play a role in forecasting stock prices in Taiwan, Hong Kong,and South Korea.
This analysis used quarterly data on stock price indexes, money supply, and budget deficits. The
findings are generally in line with the overall the economics literature on macroeconomics while
indicate that there is a long-run equilibrium relationship regarding macroeconomic policies as well
as stock prices for each of the four nations studied; stock prices are not required to adjust rapidly
or entirely to shifts in either monetary or fiscal policies in the short term.

2. Theory of relationship
APT theory
The APT model was used in this study to determine the macroeconomic factors that influence
stock price evolution. In 1976, Stephen Ross suggested the Arbitrage Pricing Theory (APT), which
argues that the price of a stock is impacted by a number of variables. These parameters could be
internal business factors, market or behavior domain indexes, economic variables such as GDP,
inflation, or any other factors that are considered significant by the analyst. As a result, according
to the APT framework, every investment has "expected returns" and is influenced by
macroeconomic factors (the magnitude of which is not stated in the original theory).
Chen, Roll, and Roll (1986) (CR&R) investigated the APT's applicability in the US securities
market. The macroeconomic indicators in the United States were employed as proxies for the
fundamental risks that affect stock returns in CR&R (1986) research. They discovered that some
of these macroeconomic indicators, notably industrial production, modifications to the risk
premium, and yield curve twist, appeared relevant in explaining projected stock return.

3. Factors affect stock returns

Term structure of interest rate
Stephen J. Brown(1986) The interest rate term structure determines the relationship between
the yields upon default-free securities which vary only in terms of maturity. Economists have
always been interested in the factors that influence this relationship. The term structure reflects the
market's expectations of future events by providing an in-depth schedule of interest rates across
time. An understanding of the term structure allows us to extract this data and anticipate how
modifications in the underlying variables will impact the yield curve.

Czaja and Scholz (2007) employed the term structure model to investigate the
linkage between interest rate changes and stock returns. They concluded that the negative impact
of the term structure slope or term spread on the return of stocks differs by industry. The
automobile and utility industries, which rely on large initial capital investments and long-term
financing, are more susceptible to term spreads.

Alam and Uddin (2009) investigated research facilitating the existence of share market
productivity by analyzing monthly data among stock index and interest rate for fifteen
industrialized and developing nations and discovered that interest rate has a major adverse
correlation with share price in all of the countries and that fluctuations in interest rate have a vital
negative relationship with changes in share price in six of the countries. Using US and Japanese
data, Humpe and Macmillan (2007) demonstrate that there is a long run negative relationship
between long term interest rates and stock values solely in the US.

Unanticipated inflation
Inflation at its core is defined by Quah and Vahey (1995, p. 1130) as "...that component of
measured inflation that has no medium- to long-term impact on real output." This element of
inflation has to integrate into or indicate inflation expectations so as for it to be output neutral
throughout the medium to long run. The above definition removes the influence of supply shocks,
which may have a long-term effect on the price level but have no long-term effect on the inflation
rate.

Unexpected inflation is classified as either positive or negative. The null hypothesis suggests
the coefficient for these two parameters is marginally different from zero. When considering real
stock returns, the null hypothesis implies that these two components have coefficients that are
slightly different from -1. These nulls indicate that the effects of positive and negative inflationary
events on nominal and real stock returns are symmetric. The leverage effect (Black, 1976; Christie,
1982) implies that positive inflation shocks impact stock volatility and, in an indirect way, stock
returns, exceeding negative inflation shocks if they are regarded as unfavorable macroeconomic
news.

Schwert (1981) discovers a negative association between CPI shocks and stocks employing
daily returns, McQueen and Roley (1993) find circumstantial evidence of a negative correlation
for PPI news as opposed to CPI news, and Hardouvelis (1987) found the relationship irrelevant for
both measures of inflation. In contrast to some of the contradictory statements in previous studies,
our more sophisticated tests show a very substantial relationship between PPI and CPI inflation
reports and stock market returns. This correlation is most significant in large stock portfolios.

According to Modigliani and Cohn (1979), investors struggle with the money delusion,
discounting real cash flows. Nominal interest rates. As inflation rises, the discount rate rises but
the cash flows do not, which leads to reduced stock returns. As a result, there is a negative
relationship regarding inflation and stock returns. Cohn et al. (2005) present cross-sectional
research to provide empirical evidence for this prejudice in cognition.

The risk premium

The equity risk premium, defined as the anticipated return on stocks over the risk-free rate, is
a fundamental factor for every asset pricing, both theoretically and practically. It is a crucial metric
of aggregated risk-aversion and an essential predictor of corporate capital costs, personal savings
selections and government budgeting strategies. Applying the capital asset pricing model,
evidence indicating that stock markets are reasonably well linked shows that the risk premium of
an investment portfolio of US assets is determined by the covariance of the portfolio's returns with
the returns on a global market portfolio.

On a model featuring time-varying risk aversion, such as one with habitual persistence
(Campbell and Cochrane, 1999), this shows an immediate link for the variance risk premium in
order to clarify periodic fluctuations in expected returns. If the variation in the risk premium is
high, it often indicates a high level of risk aversion across the economy. (Hansen and Richard,
1987) apply the concept of international arbitrage pricing theory (IAPT) in a multi-period economy
with an adaptive stochastic depiction that has stock excess returns fluctuate with their exposures
to numerous risk determinants!

In order to evaluate expected return models, two stages are essential. The first approach is to
identify the key elements that underlie cross-sectional variances in foreign stock returns. Most
recently pointed out by Pukthuanthong, Roll, and Subrahmanyam (2019, p. 1575). "Factor
identification is one of the most important topics in finance, arguably the most important, because
factors are the primary determinants of investment performance and risk." The subsequent stage
includes determining the factor risk premia and checking for the lack of possibilities for arbitrage,
i.e. assessing the magnitude of pricing anomalies.

The variability in the risk premium regression coefficient is projected to be positive. On the
surface, this is consistent with the assumption that once the market expects high (low) fluctuation
in the future, a discount (premium) is built into pricing, culminating in high (low) future returns.
Merton (1980) uses contemporary variance estimates to determine the relationship between the
risk premium and volatility. By applying a generalized autoregressive conditional
heteroskedasticity (GARCH) depiction constructed by Engle (1982) and French, Schwert, and
Stambaugh (1987) indicate that there exists a positive relationship in the conditional anticipated
excess returns on the stock market portfolio as well as the conditional variation of its returns.

The real exchange rate

The exchange rate is the cost for converting one country's currency for another's currency.
Exchange rate fluctuations are frequently influenced by shifting credit market conditions, as
indicated by variations in interest rate differentials among nations together with shifts in central
banks' monetary policies. Maximizing profits of investors within an efficient market will guarantee
that every relevant detail presently available regarding fluctuations in macroeconomic variables is
accurately captured in current stock prices, so that investors cannot earn abnormal profits by
predicting the future movements in the stock market (Chong and Koh, 2003).

The financial crisis of Asia in the 1990s, as well as the worldwide financial crisis of 2008,
rekindled interest in the correlation among exchange rates and stock prices (Fowowe, 2015).
Recognizing how changes in the variation of exchange rates related to changes in the fluctuation
of stock prices, and vice versa, is critical for investors whenever picking an optimal investment
portfolio while handling risk efficiently.Branson and Frankel (1983) present stock-oriented model
for exchange rates in which movements in the stock market cause adjustments in the foreign
exchange market. This happens due to fluctuations in stock prices that influence wealth, which
subsequently in turn shapes the need for money.

Several studies have examined the connection among stock return and the real exchange rate:
Aggarwal (1981) identified a positive correlation in the effective rate of exchange and the return
of stock index across the United States during 1974 and 1978, whereas Soenen and Hennigan
(1988) discovered a strong negative correlation during 1980 and 1986. According to Ramasamy
and Yeung (2005), the interrelationship involving stock return and the real exchange rate might
fluctuate over time.

Money supply
Money is an accumulation of liquid assets which is commonly used as an instrument of
exchange and for debt repayment. In such capacity, it saves scarce resources allocated to exchange,
extends production resources, facilitates commerce, fosters specialization, and helps to a
betterment of society (Thornton, 2000). According to Kaldor (1982), money is merely a residue of
the economic cycle with no causal meaning.

Sprinkel (1964) was one of the pioneers in this field. He discovered a substantial link between
stock prices and the supply of money in the United States utilizing information ranging from 1918
to 1960. His results, on the other hand, were primarily based on graphical analysis. According to
Zare and Azali (2015) and Ajaz et al. (2017), there is an asymmetrical correlation regarding
monetary policy together and stock returns in Turkey, suggesting that secure and loose monetary
policies seem to have a distinct effect on stock returns, and that there is an asymmetrical
correspond throughout modifications (real appreciation or depreciation) in RER as well as stock
returns.

Ho (1983) investigated the correlation between the money supply and stock returns throughout
six Pacific Asia nations. He discovered unilateral causality linking money supply to stock returns
across Japan and Philippines, respectively, yet bi-directional causality of Singapore employing
monthly data and the minimal Final Prediction Errors.
Movements in the money supply might have an effect on real economic variables, resulting
in a lag in stock returns (Rogalski & Vinso, 1977). Both mechanisms show that fluctuations in the
money supply have a positive association with stock returns (Bilson, Brailsford, & Hooper, 2001).
In the contexts of Singapore and Japan, Maysami and Koh (2000) demonstrated that the money
supply associates positively to the stock market.

Unemployment rate
Unemployment, like other social issues, has multiple definitions. There is no particular
definition that addresses all analytical needs. On the other hand, for the improvement of
international comparability, the ILO issues guidelines to national statistical agencies on the
terminology and evaluation of unemployment. In accordance with the most recent ILO standards,
the unemployed are people over a particular age who are unemployed, available for employment,
and are proactively looking for work. A majority of nations agree that a jobless person should not
be working at all; in other words, employment becomes more prominent over unemployment.

In the words of Boyd, Hu, and Jagannathan (2005), unemployment data provides three distinct
kinds of financial market information: equity premiums, prospects for expansion (anticipated by
dividends and corporate earnings), and future rates of interest. As a result, an upsurge in the rate
of unemployment is a relatively adverse indicator for the equities market because it offers insight
regarding future dividend payouts and corporate profitability.
 In accordance with stock market analysts, majority of conclusions regarding the causal
relationship between stock returns and unemployment rates rely on linear mean regression
research. While such tests have a high sensitivity for detecting linear causal relationships, their
sensitivity to nonlinear causal relationships can be quite poor, according to Bouez Marni, Roy, and
Taamouti (2010). As a result, conventional linear Granger causality tests may fail to detect a
substantial nonlinear relationship between stock returns and the unemployment rate.

Numerous publications, including Rigobon and Sack (2002) and Bernanke and Kuttner
(2005), suggest that the Federal funds rate has a negative effect on stock market returns. As a
result, a drop (increase) in the rate of unemployment is subsequently followed by a rise (fall) in
the Federal funds rate, causing a fall ( rise ) in stock market returns.
 CHAPTER III: METHODOLOGY
1. Data collection
All 129 manufacturing companies listed on the Ho Chi Minh Stock Exchange (HOSE) are
surveyed for data from 2018 to 2021 as part of the Covid-19 epidemic. The macro determinants
are obtained from Eikons, and the stock returns are gathered using SBSC. Stock performance
includes macro factors such as inflation, risk premiums, the terms structure of interest rates, the
unemployment rate, and industrial production in the stock return.

2. Methodology
This investigation is divided into two sections: (1) Assess the influence of macro factors on
the performance of the manufacturing stock market. (2) Analyze the effect of macro factors on the
performance of each sector's manufacturing stock market. In the first test, the OLS, FEM, and
REM models are used, and in the second test, the APT model known as Hierarchical Linear
Regression is used.
A. Assess the influence of macro factors on the performance of the manufacturing stock market.

Pooled OLS regression

We use OLS for testing the effect of macroeconomic variables on the stock return. The
regression is:

R=β +β X +β X +β X +β X +β X +β X +e
i i0 i1 1 i2 2 i3 3 i4 4 i5 5 i6 6 i

Where

R : Return of a stock in the manufacturing industry.

i

X : The term structure of interest rate

1

X : The unanticipated inflation

2

X : The risk premium

3

X : The real exchange rate

4
 X : The money supply
5

X : The unemployment rate

6

No distinction between cross-sectional and time series data should be made when using the
OLS estimator to analyze data. Ordinary least squares would be used to estimate the regression's
outcome. This approach has limitations since it ignores the traits that make up each person within
a population, in this example, the character of a firm. In particular, this approach was unable to
conclusively show that the model could be used across a range of time periods. One method to get
around the restrictions of conventional least squares is to test for changes in intercept terms or
slope coefficients using temporal surrogate variables. The impact of the second variable over time
would be revealed by the interaction between time proxies and the second variable. There
shouldn't, however, be any variables in the regression model that fluctuate only over time once the
time dummy has been added. Other methods, including fixed effect and random effect, are thus
effective alternatives.

Fix Effect Method – FEM

As mentioned in the preceding section, the OLS estimator would disclose the effect of
independent factors on the dependent variable in terms of cross-sectional properties, but ignore
longitudinal properties. The appropriateness of the panel technique would then be determined;
however, the Fixed effect method (FEM) would prefer to eliminate the intercept term in order to
avoid the "dummy variable trap." In this instance, the null hypothesis for all intercept dummy
variables with the same parameter is μ₁ =μ₂ = μ3 = ... =μN

If Ho is rejected, data will be estimated using OLS. If not, at least one of the intercepts is
distinct from the others, permitting the use of the panel technique. The findings of the analysis
would present the coefficients over time in this manner.

Random Effect Method

The error components method, also referred to as the random effect technique, proposes a
constant intercept term for each entity. It is believed that the relationship between the dependent
and independent variables is cross-sectional and temporal. In addition, dummy variables cannot
represent heterogeneity in the cross-sectional dimension; the error term must do so. Generalized
least square (GLS) is utilized in place of FEM to estimate the regression model in the REM.
However, the results of the random effect method are only reliable when the error term has no
correlation with the other independent variables.

B. Analyze the effect of macro factors on the performance of each sector's manufacturing stock
market
Chen, Roll (1986) examined the applicability of the APT to the US stock market. Therefore,
adapted from this study, we employ testing for hierarchical linear regression.

R=β +β X +β X +β X +β X +β X +β X +e
i i0 i1 1 i2 2 i3 3 i4 4 i5 5 i6 6 i

Where

R : actual return on the portfolio I

i

X : The term structure of interest rate

1

X : The unanticipated inflation

2

X : The risk premium

3

X : The real exchange rate

4

X : The money supply

5

X : The unemployment rate

6

𝑇ℎ𝑒 𝑡𝑒𝑟𝑚 𝑠𝑡𝑟𝑢𝑐𝑡𝑢𝑟𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒

The gap between long-term and short-term government bonds determines the term structure
of the interest rate. The intertemporal shift in the form of the interest rate term structure is
represented by the yield spread as follows:

TR = LTGB – STGB
t t t
 Where TR , term structure of interest rates for period t; LTGB , long-term Vietnam
t t

Government Bond Yield for period t (10 years); STGB , short-term Vietnam Government Bond
t

Yield for period t (1 year).

Unanticipated inflation

Unanticipated inflation can be found as follows:

𝐼(𝑡)
𝑈𝐼(𝑡) = 𝐼(𝑡) − 𝐸[𝑡−1]

where, UI (t), unanticipated inflation for period t; I (t), realized monthly in the logarithm of
the consumer price index for period t; E[I(t)/t-1], the series of expected inflation.

Risk premium

By subtracting risk-free assets (Long-Term Vietnam Government Bond Yield 10 Year) from
market return (the overall stock market return - VNIndex), we can use the CAPM equation to
determine the risk premium:

RP = RM - LTGB
t t t

Where RP risk premium for period t; RM , return of VNIndex for period t; LTGB (Long-term
t, t t

Vietnam Government Bond Yield 10 years) for period t.

 CHAPER IV: RESULTS AND DISCUSSION
A. The influence of macro factors on the performance of the manufacturing stock market.

Data analysis
Pairwise correlations
Table 1: Pairwise correlation matrix

Variables (1) (2) (3) (4) (5) (6) (7)

(1) Return 1.000
(2) RP 0.307 1.000
(3) UR 0.121 0.208 1.000
(4) lM1 0.157 0.317 0.786 1.000
(5) lRER -0.035 -0.082 0.147 -0.062 1.000
(6) UI 0.131 0.235 0.656 0.907 -0.305 1.000
(7) TR 0.103 0.220 0.078 0.239 -0.432 0.156 1.000

As can be seen in table 1, the link between M1 and UI is strong (0.9), meaning that it is greater
than 0.8, which indicates that there is a possibility of a multilinearity problem occurring. The VIF
test is carried out in order to guarantee the occurrence of this issue.
1. Pool-OLS regression

a. Diagnostic tests for time-series data

VIF test
Table 2: Variance inflation factor

VIF 1/VIF
lM1 15.771 .063
UI 13.037 .077
UR 2.946 .339
lRER 2.766 .362
TR 1.902 .526
RP 1.176 .851
Mean VIF 6.266 .

The table shows the variance inflation factor (VIF) and the reciprocal of the VIF (1/VIF) for
each independent variable in the regression analysis. The VIF is a measure of multicollinearity,
which assesses how much the variance of the estimated regression coefficients is increased due to
the presence of correlation among the independent variables.

The M1 variable’ s VIF value is 15.771, indicating a high level of multicollinearity. This
suggests that there may be strong correlation between M1 and the other independent variables in
the model. The VIF value of UI variable is 13.037, indicating a high level of multicollinearity.
This suggests that there may be strong correlation between UI and M1 in the model.

Overall, the mean VIF across all variables is 6.266, which indicates an overall moderate level
of multicollinearity in the model (James et al. 2013). This high correlation is appropriate because
if the money supply grows too rapidly, the value of the currency will fall, thereby decreasing
purchasing power. In other terms, the quantity of money will grow, resulting in inflation (IMF,
2023).

Test for heteroskedasticity

Table 3: Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

The test result is statistically significant (p=0.0000 < 0.001), indicating evidence of
heteroskedasticity in the model. This suggests that the assumption of constant variance is violated,
and there may be unequal variability of the residuals.
Therefore, to eliminate the issue, the robust OLS regression is conducted.
b. OLS regression
Table 4: Pool-OLS regression
 Return Robust
Coef. St.Err. t-value p-value [95% Conf Interval] Sig
RP .604 .031 19.25 0 .542 .665 ***
UR .011 .007 1.71 .087 -.002 .024 *
lM1 -.061 .055 -1.12 .265 -.168 .046
lRER .382 .215 1.77 .076 -.04 .804 *
UI .492 .245 2.01 .044 .012 .971 **
TR .016 .007 2.42 .016 .003 .029 **
Constant -3.833 2.077 -1.85 .065 -7.904 .239 *

Mean dependent var 0.022 SD dependent var 0.151

R-squared 0.100 Number of obs 5565
F-test 89.301 Prob > F 0.000
Akaike crit. (AIC) -5796.702 Bayesian crit. (BIC) -5750.332
*** p<.01, ** p<.05, * p<.1

The R-squared value is 0.100, indicating that approximately 10% of the variation in Return
can be explained by the independent variables in the model. Moreover, the F-test is statistically
significant (p < 0.001), suggesting that the regression model is significant in explaining the
variation in Return.

With a value of 0.604, the correlation between RP and Return is strongly positive. The p-value
for the coefficient is less than 0.01 means that it is highly significant. With a value of 0.011, the
correlation between UR and Return is marginally positive. The p-value for the coefficient is less
than 0.1 means that it is marginally significant. With a correlation of -0.061, we see that M1, and
Return are negatively correlated. However, the coefficient fails to reach statistical significance (p
> 0.1). Given that RER's coefficient is 0.382, a positive relationship may be inferred between RER
and Return. The coefficient is only slightly significant, with a p-value of less than 0.1. The
coefficient between Return and UI is 0.492, suggesting that there is a positive correlation. A p-
value of less than 0.05 indicates statistical significance for the coefficient. There is a modestly
positive correlation between Return and TR (coefficient of 0.016). A p-value of less than 0.05
indicates statistical significance for the coefficient. This regression has a negative slope since the
constant term in the equation is -3.833.

In conclude, for the Pooled OSL regression, only the money supply variable is insignificant,
the rest of statically significant in term of 1%, 5% and 10%. Importantly, the model suggest that
factors affect the stock performance the most are RP, UI, and TR.
 Test for autocorrelation
Moreover, to test for autocorrelation, which is important issue in OLS regression, we use
Durbin-Watson test.

Table 5: Durbin-Watson test for autocorrelation

Durbin-Watson d-statistic( 7, 48) = 2.509338

The Durbin-Watson d-statistic is 2.509338. This statistic is used to test for autocorrelation in
the residuals. A value close to 2 suggests no significant autocorrelation.

2. OLS, FEM and REM regression

a. Diagnostic tests for panel data

Test for autocorrelation
Table 6: Wooldridge test for autocorrelation

In this case, the test results indicate that the F-statistic is 0.429 and the associated probability
(Prob > F) is 0.5140. Since the probability value (0.5140) is greater than the conventional
significance level of 0.05, so there is no significant first-order autocorrelation in the panel data
model.

Test for heteroskedasticity

Table 7: White's test for heteroskedasticity
 The associated probability (Prob > chi2) is 0.0207, which is less than the conventional
significance level of 0.05. Based on these results, we can conclude that there is evidence of
heteroskedasticity in the model
 b. OLS model
Table 8: Cross-sectional time-series FGLS regression

The Wald chi-squared test statistic for the overall model is 911.94 with 6 degrees of freedom.
The associated probability (Prob > chi2) is 0.0000, indicating that the model as a whole is
statistically significant.
With a value of 0.5368637, the correlation between RP and Return is strongly positive. The
p-value for the coefficient is less than 0.01 means that it is highly significant. With a value of
0.0119371, the correlation between UR and Return is marginally positive. The p-value for the
coefficient is less than 0.01 means that it is highly significant. With a correlation of -0.075, we see
that M1, and Return are negatively correlated, and the coefficient reach statistical significance at
5% level. Given that RER's coefficient is 0.378, a positive relationship may be inferred between
RER and Return. The coefficient is significant, with a p-value of less than 0.05. The coefficient
between Return and UI is 0.428, suggesting that there is a positive correlation. A p-value of less
than 0.01 indicates statistical significance for the coefficient. There is a modestly positive
correlation between Return and TR (coefficient of 0.009). A p-value of less than 0.05 indicates
statistical significance for the coefficient. This regression has a negative slope since the constant
term in the equation is -3.037.

In conclude, for the Pooled OSL regression, all the variables RP, UR, lM1, lRER, and TR
have coefficients that are statistically significant at varying levels of significance (p < 0.01, p <
0.05). Importantly, the model suggest that factors affect the stock performance the most are RP,
UR, UI and TR.

c. FEM model
Table 9: Fixed-effects Model
 The F-statistic is 101.25, and the associated probability is less than 0.001, indicating that the
overall regression model is statistically significant. The R-squared values indicate the proportion
of variance explained by the model is about 10%.

An increase in TR (Term structure of interest rate) is correlated with a rise in the dependent
variable (the coefficient of TR is 0.0155879). This variable's significance level is 1%, and the p-
value is 0.006. A positive relationship is indicated by the RER (Real exchange Rate) coefficient
of 0.3775248. The coefficient is not statistically significant (p = 0.147). The coefficient for M1
(Money Supply) is -0.0620787, indicating a negative correlation. The coefficient is not statistically
significant (p = 0.187). Coefficient of 0.0112115; positive correlation of UR (Unemployment
Rate) and the stock return. The correlation coefficient is statistically significant with a p-value
of 0.077. Coefficient of 0.4966914; positive correlation of UI (Unanticipated inflation) and the
stock return. The correlation coefficient is statistically significant with a p-value of 0.028. Finally,
the coefficient for RP (Risk Premium) is 0.5995175, indicating a positive association between the
two, and its p-value of 0.000 demonstrates its strong statistical significance.

The fixed-effects regression model demonstrates that some independent variables have a
statistically significant effect on the Return. In particular, the risk premium (RP) variable and term
structure of interest rate (TR) have a highly significant positive impact which means these factors
are important element when consider the stock performance. Moreover, the UI (Unanticipated
inflation) also impact significantly on the stock market in Covid-19n period whereas the
unemployment rate (UR) has only marginally significant positive effects. The real exchange rate
(lRER) and money supply (lM1) variables, on the other hand, do not have statistically significant
effects.

In addition, the analysis reveals the existence of group-specific effects (random effects), but
the F-test reveals that these effects are not statistically significant.

d. REM regression
 Table 10: Random-effects Model

R-squared indicates that approximately 10% of the variation in the dependent variable
(Return) can be accounted for by the independent variables within each group. The Wald chi-
square test result is 0.0000, indicating that the aggregate effect of the independent variables on
Return is strongly supported by the evidence.
The random-effects GLS regression analysis yields comparable results to the FEM regression
analysis. the risk premium (RP) variable and term structure of interest rate (TR) have a highly
significant positive impact which means these factors are important element when consider the
stock performance. Moreover, the UI (Unanticipated inflation) also impact significantly on the
stock market in Covid-19 period whereas the unemployment rate (UR) has only marginally
significant positive effects. The real exchange rate (lRER) and money supply (lM1) variables, on
the other hand, do not have statistically significant effects.

3. Comparation of OLS, FEM and REM models

a. Hausman test

Table 11:Hausman Test

 The chi-square test statistic is very close to zero, and the corresponding p-value (Prob>chi2)
is 1.0000>0.05. This indicates that the choice of the random-effects model is better than fixed-
effects model.

b. Breusch and Pagan Lagrangian multiplier test

Table 12: Breusch and Pagan Lagrangian multiplier test
 The test statistic, chibar2(01), is calculated as 0.00, and the p-value (Prob > chibar2) is 1.0000.
Based on the results of the Breusch and Pagan test, there is no significant heteroscedasticity in the
random effects, therefore, choosing the OLS model over the REM model could be appropriate.

As the results, the OLS model is the most appreciate method to examinate the relationship
between macro factors and manufacturing stock performance. Therefore, the conclusion would be
the result of the OLS model.

Therefore, this study suggests that in the Covid-19 period, all the variables money supply
(lM1), risk premium (RP) , term structure of interest rate (TR), the real exchange rate (lRER),
unemployment rate (UR) and UI (Unanticipated inflation) have impact on the Vietnam stock
market, particularly, manufacturing stocks. Importantly, the model suggest that factors affect the
stock performance the most are risk premium, unemployment rate, unanticipated inflation and nd
the factors have moderately impact is term structure of interest rate.

B. The effect of macro factors on the performance of each sector's manufacturing stock market
1. Data analyzes.

Table 13: Pairwise correlations for independent variables

Variables (1) (2) (3) (4) (5) (6)

(1) lM1 1.000
(2) TR 0.239 1.000
(3) UI 0.907 0.156 1.000
(4) lRER -0.062 -0.432 -0.305 1.000
(5) UR 0.786 0.078 0.656 0.147 1.000
(6) RP 0.317 0.220 0.235 -0.082 0.208 1.000

As can be seen in table 13, the link between M1 and UI is strong (0.9), meaning that it is
greater than 0.8, which indicates that there is a possibility of a multilinearity problem occurring.
However, as discussing above, this relationship is acceptable so 2 variables remain in the test.

Table 14: Pairwise correlations for dependent variables

 Variables (1) (2) (3) (4) (5) (6)
(1) Returntech 1.000
(2) Rindustr 0.148 1.000
(3) Rheal 0.108 0.088 1.000
(4) rfood 0.155 0.084 0.092 1.000
(5) rcon 0.141 0.126 0.107 0.064 1.000
(6) rchem 0.115 0.174 0.165 0.126 0.165 1.000

As can be seen in table 14, all the variables have low correlation which means in the covid-
19, the movement of each industry is independent to each other. The dependent variables include
sectors within the manufacturing industry: Chemicals, Construction and Basic resources,
Food&beverage, Healthcare and Pharmaceuticals, Industrial Goods and Services and Technology
and telecomunications.
2. APT model: Hierarchical Linear Regression
 Chemicals, Construction and Basic resources, Food&beverage, Healthcare and
Pharmaceuticals, Industrial Goods and Services and Technology and telecomunications.

In all sector, the significant variable is "RP" (Risk Premium) at 1% level. The positive
coefficient indicates that an increase in the risk premium is associated with an increase in the return
in this sector. This suggests that investors are willing to take on more risk when the risk premium
is higher in the period of Covid-19.

Moreover, in the Food & beverage sector, the real exchange rate (lRER) has positive impact
on the return, it is indicating that an increase in the exchange rate is associated with an increase in
the return in this sector. In this period, the shortage of foods worldwide raises the demand for these
products, therefore, as a agriculture market, Vietnam business had taken advantage of this
opportunity. So, when the exchange rate increase, companies can export with higher revenue
which results in higher returns of stocks.

In the Chemicals sector, unanticipated inflation and unemployment rate has positive effect on
the stock performance. However, the inflation does not have a considerable impact because the p-
value is significant at 10%, a high acceptance level. In contrast, the unemployment rate has
significant impact on the stock return of this sector. The reason is the high lay-off workers in this
period to cut off expenses is the consequence from pushing net income of companies. This factor
affects significantly on this sector because the demand for chemicals is shapely decrease.

In summary, the risk premium (RP) is the common factor that significantly affects all the
dependent variables in the equations. An increase in the risk premium is associated with higher
returns in the respective industries or sectors. This suggests that investors demand higher
compensation for taking on additional risk, leading to higher returns in riskier investments. For
Chemicals sector, higher unemployment rate can push the return, however, this solution is not
encouraged because high unemployment rate results in the economy depression.
 CHAPTER V: CONCLUSIONS

In conclusion, this study contains all 129 manufacturing companies listed on the Ho Chi
Minh Stock Exchange (HOSE) for period from 2018 to 2021 as part of the Covid-19 epidemic.
Stock performance includes in the stock return and the macro determinants are inflation, risk
premiums, the terms structure of interest rates, the unemployment rate, and industrial production.

This investigation is divided into two sections: (1) Assess the influence of macro factors on
the performance of the manufacturing stock market. (2) Analyze the effect of macro factors on the
performance of each sector's manufacturing stock market. In the first test, the OLS, FEM, and
REM models are used, and in the second test, the APT model known as Hierarchical Linear
Regression is used.

For the stock performance in general, this study suggests that in the Covid-19 period, all the
variables money supply, risk premium , term structure of interest rate, the real exchange rate,
unemployment rate and Unanticipated inflation have impact on the Vietnam stock market,
particularly, manufacturing stocks. Importantly, the model suggest that factors affect the stock
performance positively the most are risk premium, unemployment rate, unanticipated inflation and
the factors have moderately impact is term structure of interest rate. For all stocks, an increase in
the risk premium is associated with higher returns in the manufacturing industry. However, the
solution that increase the inflation and unemployment rate is not recommended because the
increase in these factors results in the economy depression.

For each industry, the research shown that the risk premium is the important factor that
significantly affects all the sectors. An increase in the risk premium is associated with higher
returns in the respective industries or sectors. This suggests that investors demand higher
compensation for taking on additional risk, leading to higher returns in riskier investments. For
Chemicals sector, higher unemployment rate can push the return, however, this solution is not
encouraged because high unemployment rate results in the economy depression.
This study has weak implication for practical purpose due to the limitation of time period and
selected industry. The time period lasts for 4 years span which unable to researchers to look at the
changes over time and explore the significant relationship of the selected variables. The authors of
this study only collected manufacturing industry stock return while the macroeconomic factors are
adjusted for the whole market.
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