STOCK MARKET DEVELOPMENT AND ECONOMIC GROWTH IN VIETNAM

Abstract

For many years, the relationship between the financial system and economic growth has attracted the attention of scholars intending to uncover the direction of the relationship. The stock market is a part of the financial system and plays an essential role in channelling equity funds into the economy and creating liquidity for the equity instruments. A substantial empirical study postulates that the stock market can boost the economic growth of an economy. However, other studies assert that, at best, the stock market is an unimportant economic driver.

This thesis aims to examine the causal relationship between the stock market and economic growth in Vietnam in the period from 2000 to 2015. In order to examine the potential impact of the financial crisis and develop a well-functioning stock market in Vietnam, this study also undertakes a critical comparative quantitative research of a selected developing country in the South-East Asian region to identify potential policy implications. This analysis utilises the Autoregressive Distributed Lag Model to investigate the causal linkage in the long and short-run between the stock market and economic growth. The determinant vectors present in the stock market are the price index and the size of market capitalisation.
This study defines economic growth as a real increase in gross domestic product per capita. Then, to develop the well-functioning stock market in Vietnam, this study undertakes a critical comparative quantitative research of a selected developing country in the South- East Asian region for the implications.
The findings of this study suggest that there are significant cointegration relationships between stock market development and economic growth in Vietnam from 2000 to 2015. Furthermore, there are also significant cointegration relationships between economic growth and the development of the banking sector and foreign direct investment. In the long run, the market capitalisation has a positive impact on economic growth. Conversely, economic growth has a negative long-run relationship with the stock market index. This negative relationship is significant, but the impact is low. In the short run, stock market capitalisation size, and the economic growth; stock market index and economic growth are pairly bi- directional short-run Granger causality relations. The findings also suggest that, from 2000 to 2015, economic growth supports the development of the money market and attracts more foreign direct investment inflows in Vietnam. However, in this period, the speed in increasing FDI was lower than speed of economic growth leads to the negative sign in the long run relationship between FDI and economic growth.

Also, in the comparative study, the findings in the Vietnam case are consistent with the results obtained for the pre-crisis subsample in the case of Thailand. The findings suggest the causality runs from both directions between the stock market and economic growth. However, when the crisis data was taken into consideration, the significant estimated long-run coefficients give a stronger negative impact that confirms the financial crisis worsened the economic conditions in Thailand between 1994 and 2014.