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. In other words, is it, or will it be a a safe and profitable investment for the future. 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 tests will primarily focus on an examination of the validity and applicability of the technical analysis of both tests implemented.
Test of Randomness.
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. The Vietnamese Stock Market has shown great promise over the past decade. In an attempt to measure random walk hypothesis of this market, these tests were summarily applied. They were applied to a series of returns, weekly, of the Vietnamese price index. They revealed that there are, indeed, substantial deviations from the random walk hypothesis of the returns in the stock market in Vietnam.
Test of Predictability.
Additionally, predictability was the next goal. In order to measure predictability of the Vietnamese Market, applicability tests of technical trading rules were used. These tests showed that the prices of stock changes in the Vietnamese market, can be predictable. This predictability factor means that such profitably can exploit trading cost nets. In light of these results, the logical conclusion that can be gleaned is that the Vietnamese stock market is not weak-form efficient.
Efficient Market Hypothesis.
The Efficient Market Hypothesis is one of the most debated issues in business. The United Kingdom and United States markets can both be considered at the very least weak-form markets. (Bachelier, 1900.)
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, from having only two stocks traded at the beginning to 258 listed companies on the Ho Chi Minh Stock Exchange and 328 companies 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 this market, specifically, the Ho Chi Minh Stock Exchange. This research seeks to see if the evidence points to Vietnam Stock Market is, through 2006-2010 a week form efficiency.
Overview.
In 1986, Vietnam made a series of what has proven to be profitable reforms to their economic policies and banking systems. Vietnam's first stock market was launched in 2000. It is known as the Ho Chi Minh City Securities Center (HoSTC). The evidence of its growth is clear. The first day of trading was in July of 2000, with only two equities, REE and SAM. By 2010, the number of equities rose to 680, an impressive growth. Moreover, the market value is close to 33 billion USD, which equal to 39 per cent of Vietnam's GDP (USAtoday, 2010). 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)
Conclusion.
The Vietnamese stock market has had great growth and great challenges. 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 has not been sufficient empirical studies on this market.
Literature Review: Empirical Evidence on Efficient market Hypothesis.
Nearly all of the research, empirical and otherwise, on theory of the efficient markets concerns whether prices "fully reflect" a particular subset of information (Fama 1970). Particularly, the empirical studies have been divided in tests on the strong-form, semi strong-form and weak-form
of the efficient market hypothesis.
Various studies have attempted to test the hypothesis that most early empirical works have resulted in evidence supporting the weak-form of market efficiency. Most of the information is gleaned from the random walk literature. Studies have attempted to test this hypothesis by examining the correlation between the current return on a security and the return on the same security over a previous period. If the random hypothesis were true, then the correlation would be expected to be zero. In 1937 Cowles and Jones developed one of the first tests of the random walk hypothesis (RWH). There were a number of errors acknowledged, no less, in the research. Consequently, the result of their study does not support the RWH.
Fama (1970), and the earlier works of Kendall, found a series of speculative price changes to be linearly independent. This has been measured by auto-correlation, and can be defined by random walks. Osborne (1959), Cootner (1962) and Fama (1965) found similar results. (Dimson and Mussavian 1998). Osborne (1959) attributed an economic rationale behind the independence of successive price changes, claiming that the decisions of investors in an individual security are independent, which is one reason why we see independent price changes. (Fama 1970)
Since information is random in appearance, then stock price movements should follow a random
walk. This would indicate that they are statistically independent. (Leroy 1989) Additionally, Fama (1965) applies the serial correlation test. Alexander found a very small positive correlation, which is statistically no different than zero. He used the filter rule technique to daily data of 30 individual stocks quoted in the Dow Jones Industrial Average for the period from 1956 to 1962. There, the
number of runs was found to be smaller than expected, which indicates that the positive correlation found by the serial correlation test was shown.
Both of the aforementioned tests show that the independence in the successive price changes is either one of two thins: 1) Extremely small; or 2) Nonexistent. The filter rule technique also showed no profitability. All this lead Fama to conclude that the DJLA was weak-form efficient. The same result was found by examining the gains from technical analysis.
Alexander (1965) has shown that the particular filter strategies have had no effects on profits when transaction costs were taken into account. The results of Fama and Blume (1966) provide further evidence. Up to the 1990s, Fama and Blume (1966) remained the best peer-reviewed, most influential paper on mechanical trading rules. The initial tests also supported semi-strong form of efficient market hypothesis. Initially carried out in the form of event studies, the testing of semi-strong form of market efficiency the norm. (Fama 1991). The empirical tests were concentrated on information such as stock splits or earnings announcements, and/or speed and correctness of price adjustment to new events. These pioneers
on this kind of study, Fama et al. (1969), studied the reaction of 940 stocks to split announcements and concluded that market prices adjusted properly to the information that resulted in a split. (Findlay and Williams 2000)
Ball and Brown (1968) examined the effects of annual earning announcements. They found that investors were not able to trade profitably. The reason for this was that the announcements since the relevant information had already been reflected in the stock prices by the time of an announcement. Since the first event studies, numerous other studies continue to value a multitude of crucial news
events such as takeovers, share issues, repurchases, dividend announcements, and so on. (Dimson and Mussavian 1998; Fama 1970)
There are a number of factors evidencing weak and semi-strong form efficiency, while evidence for strong-form efficiency remains to be seen. Empirical tests of strong form efficiency are focused on two issues: whether insider trading results in abnormal returns, or if professional investors, analysts and
managers have profitable information. (Fama 1991, Fama 1970)
Niederhofferand Osborne (1966) have shown that the specialists on the NYSE cheat the system by using their access to information about unfilled limit orders to obtain superior returns. Scholes (1972) also argues that officers of corporations might have monopolistic access to information about their firms. (Fama 1970) Jaffe (1974) also found and reported that there was, and still is considerable evidence that insider trades are profitable. Jensen (1968) investigated fund managers' performance using 115 mutual funds over the period 1955-1964 and shows that funds on average could not outperform the old strategy. (Dimson and Mussavian 1998)
Since the late 1970s, numerous studies have provided theoretical and empirical challenges to the efficient market hypothesis. In other words, the hypothesis is being hit at all sides. Recent empirical results have clearly shown that stock returns to be partially predictable and non-normally distributed. Incidentally, this is contrary to the EMH predictions. Recent literature shows that there is evidence against the random walk hypothesis for stock returns (Poterba and Summers 1986; Fama and French 1988; Lo and MacKinlay 1988).
A number of studies find the evidence inefficiency consistent with the weak form of efficient market hypothesis; namely excess volatility (Shiller 1981), momentum effect (Lehman 1990; Jegadeesh and Titman 1993), overreaction (Debondt and Thaler 1979), mean reversion (Fama and French 1988; Poterba and Summers 1986), and anomalies (Lakonishok 1988; French 1980; Ariel 1990).
These studies concentrate such as on size effects and January effects, whereas major studies also show inefficiency consistent with semi-strong form of efficient market hypothesis, (Fama and French 1993). (Fama 1991; Fama 1998; Malkiel 2003)
