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=
+
m
k
k T
k
T T m Q
1
2
) (
) 2 ( ) (
,
where m is the number of lags being tested and T is the sample size. The Ljung-Box Q(m)
statistic is used as a test statistic for the null hypothesis
H
0
: ) 1 ( = ) 2 ( = = ) (m = 0,
against the alternative hypothesis
H
1
: ) (k 0 for some } ,..., 1 { m k
The decision rule is to reject H
0
if
2
) (
> m Q , where
2
=
+
=
where (T m + 1) is the maximum number of overlapping vectors which can be formed
with a time series of length T, and
q
q VR =
where ) (
2
q is 1/q times the variance of q-differences and ) 1 (
2
is the variance of the
first differences. The LOMAC variance ratio tests the null hypothesis that the variance
ratio, VR(q), equals 1. Alternatively, values for VR(q) that are greater than 1 imply
positive serial correlations while values that are less than 1 imply negative serial
correlations or mean reversion. These hypotheses are tested under both the homoskedastic
and heteroskedastic specifications of the variances.
The values of ) 1 (
2
and ) (
2
q are given by Lo and MacKinlay as follows:
58
=
nq
t
t t
Y Y
nq
1
2
1
2
) (
) 1 (
1
) 1 (
2 2
) (
1
) ( =
=
q t t
nq
q t
Y Y
m
q
where
+ =
nq
q
q nq q m 1 ) 1 (
and
) (
1
0
Y Y
nq
nq
=
Under the assumption of homoskedasticity, the standard test statistic Z(q) is derived:
) 1 , 0 ( ~
)] ( [
1 ) (
) (
2 / 1
N
q
q VR
q Z
=
where
) ( 3
) 1 )( 1 2 ( 2
) (
nq q
q q
q
=
Lo and MacKinlay (1988) also refined the Z* test statistic which is robust to
heteroskedasticity:
) 1 , 0 ( ~
)] ( [
1 ) (
) (
2 / 1 *
*
N
q
q VR
q Z
=
with
59
) (
) ( 2
) (
2
1
1
*
j
q
j q
q
q
j
=
and
=
+ =
=
nq
t
t t
nq
j t
j t j t t t
Y Y
Y Y Y Y
j
1
2 2
1
1
2
1
2
1
] ) [(
) ( ) (
) (
In a further research, with the use of Monte-Carlo simulations Lo and MacKinlay (1989)
have shown that the asymptotic distribution of Z*(q) performs well in finite sample, and
the variance ratio test performs better than both the Ljung-Box test of serial correlation and
the ADF test of unit roots.
To empirically examine the random walk hypothesis in the Vietnamese stock market, I
will apply the above battery of tests on the weekly series of the VN-Indexs returns.
4.2.2 Tests of Technical Analysis
There are many technical trading rules which can be tested in this study. Many of the
previous academic researches on the effectiveness of technical analysis mainly implement
filters, moving averages, momentum, support and resistance rules. In this study I replicate
the analysis of Brock et al. (1992) by testing one of the simplest and most popular
mechanical trading rules the moving average oscillator.
The moving average trading rule is one of the most common techniques of technical
analysis and is also perceived to be one of the most consistent mechanical trading rules.
Although there are many variations of the moving average rule, I will use two of the
60
simplest versions which have been employed by Brock et al. (1992): the Variable Length
Moving Average (VMA) and the Fixed Length Moving Average (FMA).
Moving averages are defined as the recursively updated averages of past prices. The idea
behind moving averages is that they yield insight in the underlying trend of a price series
and smooth out its volatility. The moving average rule considers two moving averages of
the level of the index price P
t
, including the short-run and the long-run moving averages
(MA). Based on the comparison of the short-run with long-run MAs, buy and sell
signals are generated. In particular, the MA decision rule is that buy (sell) signals are
generated when the short run average is above (below) the long run average. According to
Brock et al. (1992), this rule is designed to replicate returns from a trading strategy where
traders buys when the short MA penetrates the long MA from below and stays in the
market until the short MA crosses the long MA again from above. Employing the notation
of Mills (1998), the short run moving average of order n is given by
=
=
1
0
1
) (
n
i
i t t
P
n
n S
and the long run moving average of order m is given by
=
=
1
0
1
) (
m
i
i t t
P
m
m L
where clearly n<m. The key variable is therefore the length of time associated with the
short run and long run averages. The larger the variable n and m, the slower the MA adapts
and the more volatility is smoothed out. The most popular average rule is 1-200, where the
short average is one day and the long average is 200 days. Besides this rule, Brock et al.
(1992) also suggested and tested other common rules including: 1-50, 1-150, 5-150 and 2-
61
200. The rule can also be further modified by adding a band around the MAs. Brock et al.
(1992) used a one percent band and suggested that the introduction of a band would reduce
the number of buy (sell) signals by eliminating whiplash signals when the short and long
period moving averages are close (pp. 1735). With the inclusion of a certain percentage
band, buy (sell) signals are now only initiated if the short run MA (S
t
(n)) exceeds (is less
than) the long run MA (L
t
(m)), by the pre-specified percentage band. Particularly, with a
one percent band, a buy signal is emitted if
01 . 1 ) ( ) ( > m L n S
t t
and a sell signal is emitted if
99 . 0 ) ( ) ( < m L n S
t t
When the short moving average is inside and band, no signal is indicated on that day.
Whereas, a band of zero (without band) will classify all days into either buys or sells.
Given the rules and the band defined above, once a signal, either buy or sell, is
generated, the Variable Moving Average rule (VMA) call for the position to be maintained
until the short and long moving averages cross again, irrespectively of the time period
between the two opposite signals. Whereas, the Fixed Moving Average rule (FMA) rule
requires holding the position for a fixed number of days and any other signals emitted
during that period will be ignored. This is the only difference between the VMA and the
FMA.
In order to test for the hypothesis of equality between the unconditional return of a buy-
and-hold strategy and the returns generated from employing the moving average rules, the
two test statistics specified by Brock et al. (1992) will also be employed. In particular,
62
mean returns will be computed separately for the buy and sell periods. The significance of
these mean values will then be examined using the t-statistics. For buy (sell) period, the
statistic is given by
2 / 1 2 2
) / / (
r
r
N N
+
where
r
and
r
N are the mean return and number of signals for the buys and
sells; , N and
2
are the unconditional mean, number of observations and estimated
variance for the whole sample respectively. For the difference in the mean returns of the
buy-sell periods, the test statistic is given by
2 / 1 2 2
) / / (
S B
S B
N N
+
where
B
and
B
N are the mean return and number of signals for the buys;
S
and
S
N are
the mean return and number of signals for the sells. Given certain degree of freedom, if the
absolute values of these above statistics are greater than the critical values, then the null
hypothesis of equality will be rejected.
In this research, I will test both the VMA and the FMA using five pairs of short and long
term lengths suggested by Brock et al. (1992), with and without a 1% band. For the FMA
rule, I utilize a common fixed holding period of ten days. Thus, for each type of moving
average, there will be 10 tests totally, including: (1,50,0), (1,50,0.01), (1,150,0),
(1,150,0.01), (5,150,0), (5,150,0.01), (1,200,0), (1,200,0.01), (2,200,0) and (2,200,0.01).
All of these tests will be conducted at the 5% level of significance.
63
To summarize, the weak-form efficiency of the Vietnamese stock market will be
investigated using two groups of tests. The first group of tests will check for the
randomness of the data to see if the stock market in Vietnam follows the random walk
hypothesis. The second group of tests will examine the predictability/unpredictability of
the market by testing one of the most widely used technical trading rule the moving
average rule.
64
In this section, the empirical results of the tests chosen will be performed. To recall, the
following three kinds of test will be employed to examine the random walk hypothesis in
the Vietnamese stock market: (1) Portmanteau tests; (2) Unit root tests; and (3) Variance
ratio test. The above approaches will be tested on the series of weekly returns of the VN-
Index.
5.1.1 Portmanteau test
In testing for autocorrelations in my data, the Ljung-Box test is conducted first. Under the
portmanteau test, the null and alternative hypotheses are formed as follows
H
0
: no autocorrelations exist in the data
H
1
: autocorrelations exist in the data
Following Tsay (2005), the Ljung-Box test statistics Q(5) and Q(6)
21
are applied to the
weekly return distributions. Besides, the Ljung-Box statistics for lags 1 and 10 are also
presented to yield a more comprehensive view. Table 5.1 reports the test statistic result.
21
The number of autocorrelations (m) is chosen as m ln(T). While there are 299 observations totally, m
takes the value of 5.7 approximately.
Chapter 5
EMPIRICAL RESULTS AND ANALYSIS
5.1 TESTS OF RANDOM WALK HYPOTHESIS
65
Table 5.1: Ljung-Box test statistics
22
VN-Index Weekly Return Q(1) Q(5) Q(6) Q(10)
Test statistics 22.285* 63.967* 68.095* 72.606*
p-value 0 0 0 0
Note: * Significant at the 5% level.
The Ljung-Box statistics reported for the four lags are all significant at the 5% level.
Hence, the null hypothesis of no autocorrelations in the data is rejected, suggesting that
autocorrelations exist in weekly return series. As what have been mentioned, the Ljung-
Box test statistic is very robust to detect linear dependence in time series data. Given the
above results, it can be said that the data of weekly return on the Vietnamese stock market
are characterized by linear dependence. As such, there is no need to further conduct the
BDS test of non-linear dependence.
5.1.2 Unit Root tests
In order to test for unit roots in the weekly series data, both the ADF and the Phillips-
Perron tests are performed. Under both the two tests, the null and alternative hypotheses
are as follows:
H
0
: unit root exists in the data (nonstationarity)
H
1
: no unit root exists in the data (stationarity)
22
The Ljung-Box test is performed using Eviews.
66
The results are given in Table 5.2. Panel A presents the result of the ADF test for weekly
returns of the VN-Index, or the first difference of the weekly price index. Panel B shows
the Phillips-Perron test statistic.
Table 5.2: Unit Root Tests
23
Test with
No Trend With Trend
A. ADF test
Test statistical value -5.65201 -5.643231
Critical values
- 1% level -3.452366 -3.989472
- 5% level -2.871128 -3.425132
-10% level -2.57195 -3.135675
B. Phillips-Perron test
Test statistical value -14.07982 -14.07212
Critical values
- 1% level -3.452141 -3.989153
- 5% level -2.871029 -3.424977
-10% level -2.571897 -3.135584
As can be seen from Table 5.2, both the ADF and the Phillips-Perron tests, with and
without trend, strongly reject the null hypothesis of a unit root at all three levels of
significance. They indicate that the weekly return series is stationary and exhibit linear
trend. This is in line with the Ljung-Box tests results. Besides, stationarity may possibly
be an explanation for the serial correlation of the data. Up to this stage, we can reject the
random walk hypothesis for the Vietnamese stock market. Nevertheless, further test,
particularly the LOMAC variance ratio test, should be conducted and reported to finally
confirm the non-randomness of the data.
5.1.3 Variance Ratio Test
23
Unit root tests are performed using Stata.
67
Using a base interval of one week, I conduct the single variance ratio tests proposed by Lo
and MacKinlay (1988) for lags of two weeks to four months. Under the LOMAC test, the
null and the alternative hypotheses are as follows:
H
0
: VR(q) = 1 The return series follow a random walk
H
1
: VR(q) 1 The return series does not follow a random walk
The variance ratios VR(q) and both the z-statistics under homoskedasticity and
heteroskedasticity conditions are reported in Table 5.3.
Table 5.3: Variance-ratio estimates VR(q) and variance-ratio test statistics z(q) and
z*(q) for a one-week base observation period
24
Number of q of base observations aggregated
to form variance ratio
Time period
Number of nq
of base
observations
2 4 8 16
1.2728 1.6956 2.4306 2.8502
(4.7173)* (6.429)* (8.363)* (7.2683)*
28/07/2000 -
31/07/2006
299
[2.9182]* [4.1281]* [5.2348]* [4.5582]*
Note: Variance ratio test of the random walk hypothesis for the value-weighted market index for the
sample period from 28/07/2000 to 31/07/2006. The variance ratios VR(q) are reported in the main row
with the homoskedasticity z(q) given in parentheses immediately below the main row, and the
heteroskedasticity z*(q) given in brackets below the z(q) statistics. Under the random walk hypothesis,
the value of VR(q) is one. The critical value at the 5% significance level for both the z(q) and z*(q) is
2.49
* Significant at 5% level.
The idea of the variance ratio test is to check whether the variance of the increments can be
described as a linear function of the time interval. From the tests results performed in
Table 5.3, the null hypothesis of a random walk can be rejected at the 5% significance
level for the studied sample. Besides, the estimates of variance ratio are larger than 1 for
all cases. Lo and MacKinlay (1988) suggest that the variance ratios approximately equal to
24
Test is performed using MATLAB
68
one plus the first-order autocorrelation coefficient estimator of weekly returns. Hence, that
all the variance ratios of the test are larger than one indicates positive autocorrelation for
weekly holding period returns. Moreover, both the z(q) and z*(q) statistics increase with
time interval implying that the significance of rejections becomes stronger as coarser
sample variances are compared to weekly variances.
Given the results of the three tests performed above, it can be seen that the random walk
hypothesis can be strongly rejected for the Vietnamese stock market. In order to conclude
whether the rejection of the random walk hypothesis is a consequence of market
inefficiency or not, further tests for predictive ability in the stock price changes should be
conducted.
69
To recall, in order to examine the predictability of stock price index in the Vietnamese
market, I employ the tests of mechanical trading rules proposed by Brock et al. (1992). In
this section, results from trading strategies based on moving average rules will be
presented. Before reporting more details, it should be noted here that in their research
Brock et al. (1992) used bootstrap techniques to explore the stochastic properties of stock
returns, accounting for some missing pieces that standard statistical tests cannot cover.
Given that the purpose of this research is to explore whether there is any degree of
predictability once the series of stock returns has been confirmed not to follow a random
walk, standard statistical tests are assumed to be sufficient.
5.2.1 VMA Results
Results from the VMA trading rules for the full sample are presented in Table 5.4. These
rules differ by the length of the short and long period and by the size of the band. For
example (1, 50, 0) indicates that the short period is one day, the long period is 50 days and
the band is zero percent. Below I present results for the 10 rules which have been chosen.
If technical analysis does not have any power to predict price changes, then it should be
observed that returns from technical trading strategies do not differ from unconditional
returns from buy-and-hold strategy. Besides, we should also observe that returns on days
when the rules emit buy signals do not differ significantly from returns on days when the
rules emit sell signals.
5.2 TESTS OF TECHNICAL ANALYSIS
70
Table 5.4: Standard test results for the VMA rules
25
(01/03/2002 31/07/2006)
Test N(Buy) N(Sell) Buy Sell
Buy >
0
Sell >
0
Buy -
Sell
543 561 0.003029 -0.001518 0.5856 0.3583 0.004546
(1,50,0)
(3.6716)* (-3.5912)* (6.2897)*
220 122 0.006446 -0.003878 0.6318 0.3115 0.010323
(1,50,0.01)
(5.5201)* (-3.6297)* (7.6173)*
568 536 0.002123 -0.000770 0.5317 0.4049 0.002894
(1,150,0)
(2.2669)* (-2.3547)* (4.0024)*
384 442 0.003008 -0.000825 0.5469 0.4027 0.003832
(1,150,0.01)
(3.0875)* (-2.1802)* (4.5754)*
572 532 0.001832 -0.000479 0.5262 0.4098 0.002311
(5,150,0)
1.8014 -1.8891 (3.1960)*
380 437 0.002735 -0.000358 0.5395 0.4233 0.003092
(5,150,0.01)
(2.7052)* -1.5117 (3.6720)*
570 534 0.001948 -0.000594 0.5316 0.4045 0.002543
(1,200,0)
(1.9869)* (-2.0737)* (3.5165)*
409 424 0.002490 -0.000789 0.5330 0.3797 0.003279
(1,200,0.01)
(2.4442)* (-2.1041)* (3.9404)*
569 535 0.001783 -0.000413 0.5272 0.4037 0.002196
(2,200,0)
1.7181 -1.7886 (3.0369)*
408 427 0.002253 -0.000643 0.5270 0.3841 0.002896
(2,200,0.01)
(2.1169)* (-1.9056)* (3.4846)*
Mean 0.002765 -0.001027 0.003791
Note: * Significant at the 5% level.
Returns are reported in daily. Rules are defined as (short, long, band). N(Buy) and N(Sell) are the
number of buy and sell signals reported during the sample. Column 4 and 5 report the mean returns
during buy and sell periods with corresponding t-statistics in parentheses, testing equality with the
unconditional mean. Column 8 indicates the differences between the mean buy and sell returns with
corresponding t-statistics testing the buy-sell difference from zero.
Results of the test of VMA rules shed some light on the potential predictability on the
Vietnamese stock market. The buy returns are all positive with an average one-day return
of 0.276 percent, which is remarkably high as compared with a mean daily return of 0.072
percent from holding the index unconditionally throughout the sample period. Similar to
25
Tests are performed by Excel Spreadsheet.
71
what have been explored in other stock markets
26
, all sell returns are negative with an
average daily returns for 10 tests of -0.103 percent which is about -23 percent at an annual
rate. The differences between mean buy and sell returns and unconditional returns are
extremely significant, confirmed by the test statistics given in Table 5.4. Fifteen out of the
twenty tests reject the null hypothesis that the returns conditional on the VMA trading
rules equal those from buy-and-hold strategy at the 5 percent significance level using the
two-tailed test. The other test statistics are marginally significant.
The Buy > 0 and Sell > 0 columns present the fraction of buy and sell returns that are
greater than zero. The buy fraction is consistently greater than fifty percent, while that for
sells is considerably less, being between 31% and 42% approximately. Under the null
hypothesis that technical trading rules do not produce useful signals, these fractions should
be the same (Brock et al., 1992, pp. 1740). By performing a binomial test whose results are
presented in the last column, it is shown that all these differences are highly significant
with test statistics being between 3 and 7.6. Thus, the null hypothesis of equality can be
rejected.
In short, returns from the VMA rules are appreciably different from a buy-and-hold
strategy and hence offer degrees of predictive ability. Moreover, different from previous
researches which found the number of significant negative returns were as twice as those
of positive returns, this research explores the opposite results. In particular, the number of
significant positive returns from the buy signals is greater than that of significant negative
returns from the sell signals. This eliminates the doubt in the sustainability of this technical
trading rule as a profitable investment strategy which can be applied for the previous
period in the Vietnamese stock market.
26
See Bessembinder and Chan (1995), Brock et al. (1992), Coutts and Cheung (2000), Hudson et al. (1996)
and Mills (1998)
72
5.2.2 FMA Results
Table 5.5: Standard test results for the FMA rules
(01/03/2002 31/07/2006)
Test N(Buy) N(Sell) Buy Sell
Buy >
0
Sell >
0
Buy -
Sell
56 55 0.026738 -0.013302 0.6250 0.2727 0.0400
(1,50,0)
(2.5576)* (-2.5886)* (4.4567)*
22 13 0.061009 -0.039873 0.8182 0.1538 0.1009
(1,50,0.01)
(4.8992)* (-3.3714)* (6.0935)*
56 55 0.022080 -0.008559 0.5714 0.3273 0.0306
(1,150,0)
(1.9571)* (-1.9808)* (3.4103)*
39 46 0.032317 -0.008653 0.6667 0.2826 0.0410
(1,150,0.01)
(2.8853)* -1.8740 (3.9771)*
56 55 0.022080 -0.008559 0.5714 0.3273 0.0306
(5,150,0)
1.9571 (-1.9808)* (3.4103)*
38 44 0.031696 -0.006826 0.6579 0.2955 0.0385
(5,150,0.01)
(2.7877)* -1.6279 (3.6755)*
58 53 0.018753 -0.006074 0.5862 0.3019 0.0248
(1,200,0)
1.5459 -1.6418 (2.7606)*
41 43 0.029606 -0.007910 0.6585 0.3023 0.0375
(1,200,0.01)
(2.6254)* -1.7421 (3.6317)*
57 54 0.019027 -0.005903 0.5789 0.3148 0.0249
(2,200,0)
1.5726 -1.6304 (2.7739)*
40 44 0.028948 -0.006785 0.7000 0.3182 0.0357
(2,200,0.01)
(2.5264)* -1.6231 (3.4561)*
Mean 0.029225 -0.011244 0.0405
Note:*Significant at the 5% level.
Under the FMA rules, buy and sell signals are triggered by the crossing of short and long
run moving averages and returns are computed as cumulative over a ten-day post signal
holding period. Results are presented in Table 5.5.
Again, these results support the same conclusions as those obtained from the VMA rules.
The mean return over the ten-day holding periods following a buy signal is 2.922 percent
73
and the mean return over the ten days following a sell signal is -1.124 percent. These
returns are significantly different from the unconditional cumulative rate of return over the
ten-day holding period of 0.689 percent. For twenty tests of significance across the buy
and sell decisions, eleven are significant at the 5 percent confidence level. Again, the
number of significant positive returns from buy signals is greater than that of significant
negative returns from sell signals. For all the tests, the fraction of buys greater than zero
exceeds the fraction of sells greater than zero. The differences between mean buy returns
and mean sell returns are highly significant with all the test statistics greater than 2.7. With
all of the above results, we again reject the null hypothesis of equality.
The results of the tests on the VMA and FMA trading rules can be summarized as follows:
i. Mean returns on both the VMA and FMA rules are significantly different from
the unconditional returns generated from buy-and-hold strategy. Particularly,
the mean return of (buy-sell) from the VMA trading rules is 5.3 times greater
than the unconditional mean return, while that from the FMA rules is 5.8 times
greater than the unconditional mean return.
ii. The buy signals are more significant than the sell signals for both moving
average rules with the number of significant positive buy signals exceeding the
number of significant negative sell signals.
iii. Both rules appear (exclusive of transaction costs) to offer profitable investment
tools which could be applied in the Vietnamese stock market over the studied
period.
74
Up to this point it can be concluded that the application of the two moving average trading
rules examined above can render predictive ability. In other words, stock price changes in
the Vietnamese market could be forecasted with the use of technical analysis. However, in
light of recent debates on efficient market hypothesis, one last crucial factor to deduce
market efficiency or inefficiency is whether these trading rules can be translated into
abnormal returns in a costly trading environment. It would likely be the case that the
inclusion of transaction costs would eradicate any abnormal returns derived from
implementing these trading rules. However, in the case of the Vietnamese stock market,
there are reasons to believe that these above trading rules could be profitably exploitable
net of transaction costs.
The profits that can be derived from these trading rules depend on the magnitude of
transaction costs and the number of transactions triggered as a result of buy and sell
signals. Particularly, whenever the short moving average penetrates the long moving
average, a signal is generated, either buy or sell or hold as for the case of no signal, and
thus a transaction is recorded until the two moving averages cross again. Transaction costs
only incur when a transaction is carried out. Basically, transaction costs include trading
cost (brokerage fees) and income tax on capital appreciation. In the case of the Vietnamese
stock market, both of these costs are relatively small. In particular, there is currently no
taxation imposed on the trading of securities in Vietnam. Besides, brokerage fees are
strictly regulated by the exchange authority, varying within a range set by the Exchange in
order to encourage the participations in the stock market. For the studied period, brokerage
fees are set within a range from 0.25% to 0.4% per transaction at the maximum. Average
across the ten VMA rules, 5.3 buy signals and 6 sell signals are issued during the studied
period of 4 years and 4 months, or 4.333 years approximately. These numbers are even
smaller for FMA rules. A trader relying on FMA rules with a ten-day holding period
75
would have entered positions based on buy signals 3.4 times, and would have entered
positions based on sell signals 3.8 times over the sample period. Combining these two
factors, trading costs per annual are relatively small as compared to the average annual
return (buy or sell) of approximately 60.55
27
percent and 65.76
28
percent conditionally on
following the VMA rules and FMA rules respectively.
Given the factors discussed above, it can be safely concluded that the two trading rules
examined had predictive ability and could be used as profitably investment tools over the
period from 01/03/2002 to 31/07/2006 in the Vietnamese stock market.
Given the results of both the tests of randomness and tests of predictability performed
above, it can be concluded that the Vietnamese stock market does not conform to the weak
form of market efficiency. In this section, I provide some explanations for the inefficiency
of the Vietnamese stock market. For this purpose, a brief summary of the tests results are
given first.
5.3.1 Summary of the tests results
In order to examine the weak-form market efficiency of the Vietnamese stock market, two
groups of tests which test for the randomness and predictability of the data have been
chosen. Randomness tests are applied on weekly stock returns over a full sample spanning
27,28
Annual return = (1 + average one-day return)
250
1.
Average one-day return is computed using the mean (buy-sell) returns, given in last column of Table 5.4 and
Table 5.5, divided by two. Number of trading days per annual is assumed to be 250 days.
5.3 ANALYSIS OF THE TESTS RESULTS
76
from the inception of the market on 28/07/2000 to 31/07/2006, while predictability tests
are applied on daily data over a sub-period from 01/03/2002 to 31/07/2006.
Tests which have been chosen for testing the randomness of the weekly series of returns
include the portmanteau test for autocorrelations, the ADF and Phillips-Perron unit root
tests for stationarity and the LOMAC variance ratio test. Under the three tests chosen, the
null hypothesis is rejected, confirming that the Vietnamese stock market does not follow a
random walk. Particularly, the Ljung-Box statistics from the portmanteau test are highly
significant at the four lags 1, 5, 6 and 10, suggesting that the data of weekly returns on the
VN-Index is linear dependent. Second, both the ADF and Phillips-Perron unit root test
indicates that the null hypothesis of unit root can be rejected, proposing that stationarity
might be an explanation for linear dependence of the time series data examined by the first
test. Finally, results from the LOMAC variance ratio test once again confirm the non-
random characteristics of the weekly return series. All the variance ratios are greater than
one, suggesting positive serial correlation in returns. Therefore, the random walk
hypothesis can be straightforwardly rejected for the Vietnamese stock market. The first
condition of weak-form market efficiency has been declined.
Empirical results from the moving average are in favour of a conclusion that the
Vietnamese stock market is inefficient, even in the lowest form. Particularly, both the
VMA and FMA rules suggest that the stock price changes in the Vietnamese stock market
are predictable, and that investment opportunities can be profitably exploited net of
transaction costs.
As a result, based on the empirical findings, it can be concluded that the Vietnamese stock
market is inefficient during the studied period. My result is in line with many previous
77
researches in the literature of efficient market hypothesis in developing and emerging
countries.
5.3.2 Possible explanations of the market inefficiency in
Vietnam
The empirical results from the two groups of tests consistently indicate that the
Vietnamese stock market is not efficient in the weak-form. Obviously, finding evidence
against weak-form market efficiency is not unique with my study as many other
researchers have reached similar conclusions (for example, see Buguk and Brorsen, 2003,
for the Turkey stock market; Karemera, Ojah and Cole, 1999, for fourteen markets in Latin
American and Asian countries, etc.). As the case of many other developing and emerging
countries, the rejection of market efficiency in Vietnam is understandable and explanations
for this are not difficult to find. The newness of the stock market in Vietnam suggests
typical problems commonly seen in a newly emerged market such as market thinness, low
liquidity, investors irrational behaviours, unsatisfactory corporate governance system,
dubious accounting practice, market manipulation and insider trading.
First, market thinness characterized by non-synchronous or infrequent stock trading can
provide some justifications for positive serial dependence in stock prices. First, this
phenomenon can be accounted for by the explanations by Lo and MacKinlay (1988) who
posit that small-capitalized firms trade less frequently than large-capitalized firms.
Therefore, information is impounded first into large-capitalized firms prices first, and then
small-capitalized firms with a lag and this lag may induce positive serial correlation in the
index series. A second reason lies in the case where new information that arrives late in the
day after the last transaction. Hence, this information will only be reflected in next days or
78
even next weeks prices. This may create some degrees of predictability in market returns
as new information is not instantly embedded in stocks prices, thus offering profitably
exploitable opportunities. Another possible cause for this is the imposition of price limits
on daily trading prices by the State Securities Commission of Vietnam (SSC). Price limits
in Vietnams stock market may create artificial positive correlations in stock price returns
as stocks may need certain time to reach their equilibrium price. One last reason lies in the
shareholding structure of the listing companies in the Vietnamese stock markets. As what
have been mentioned in Chapter 2, most of the listing companies on the HOSTC are
privatized entities which were originally state-owned enterprises. After privatization, the
government of Vietnam still holds major shares in some companies. These shares cannot
be traded on the exchange. In such cases, both domestic and foreign institutional investors
are not interested in investing in those companies where they cannot have influential roles.
Therefore, it is understandable that a market which is characterized by a considerable
number of such kinds of shares will provide low liquidity.
Another possible explanation for the inefficiency of the Vietnamese stock market is the
unsatisfactory corporate governance system which in turns leads to the problem of
informational asymmetries, dubious accounting system, creating an exploitable
environment for insider trading and market manipulation. Although the SSC does
promulgate regulations on informational disclosure, it does not have the mechanism strong
enough to supervise the compliance with such requirements. Therefore, informational
disclosures by listing companies in Vietnams market have been inadequate, less up-to-
date and tend to be delayed, enabling a minority group of people to engage in insider
trading.
79
As having been stressed by Fama (1965), the degree of efficiency of a market depends
largely on market players. Market is efficient if there are a sufficient number of
sophisticated traders, or experts and professional investors, whose activities can
effectively erase dependencies of price changes. However, in a newly emerged stock
market like Vietnam, the majority of investors are characterized as irrational with herding
behaviour, especially during boom and bust periods. Investors herding behaviour would
render non-random patterns in stock price changes as a result of investors mimicking the
behaviour of the majority of other investors irrationally. As such, the high level of
predictability reported in this research could be partly explained by investors irrational
behaviour.
Overall, market imperfections which are common in developing and emerging markets
like Vietnam due to the ineffective legal structures, lack of transparency that prevent the
smooth transfer of information, and investors irrational behaviours are all contributing
factors to the inefficiency of the Vietnamese stock market. It has been postured that the
presence of persistent autocorrelations in a market may be the outcome of an unusual rapid
growing economy rather than evidence against the EMH. Even though it is true that the
growth rate of the Vietnamese economy has been relatively high over the past ten years,
approximately 7.3% annually, and is the second highest growing economy after China in
the Asia Pacific region, I believe that this is not the true reason of market inefficiency in
the Vietnamese stock market. Given all the relevant factors discussed above, the finding of
market inefficiency in the Vietnams market is not surprising.
80
This study tests the weak-form efficiency of the Vietnamese stock market, a developing
market, to fill the gap in the literature of the Vietnams market. This was done by
investigating the randomness of the data through tests of the random walk hypothesis and
examining the applicability and validity of technical analysis through tests of technical
trading rules.
From the results of the Ljung-Box portmanteau test, the ADF and Phillips-Perron unit root
tests and the robust LOMACs single variance ratio test, the random walk hypothesis was
rejected for the Vietnamese stock market. However, the rejection of random walk does not
necessarily imply market inefficiency. Hence, further tests of technical trading rules
including the Variable Moving Average and the Fixed Moving Average rules were
conducted. It was revealed that the Vietnamese stock price index had predictive ability
which helped generate quite significant returns net of trading costs. Evidence from both of
the tests was significant enough to reject the weak-form efficient market hypothesis for the
Vietnamese market. The evidence of market inefficiency is understandable for a newly
emerged stock market like Vietnam, where market imperfections and investor irrationality
are the two main sources of price predictability.
Chapter 6 CONCLUSION
6.1 CONCLUDING REMARKS
81
The findings achieved from this study are quite decisive and conclusive in the sense that
all of the tests taken are extremely significant in rejecting the weak-form efficient market
hypothesis of the Vietnamese stock market. However, the conclusions of this research
should be treated with casualty as there exist some limitations in both the data and the
methodology.
First, as what have been mentioned for several times throughout this study, the data period
of six years time is quite limited as compared to that of other empirical researches on
various markets. Since statistical tests of randomness require sufficiently lengthy data, the
reliability of the tests results may be biased. Hence, as time passes and more stable data
becomes available, a further study on the same issue should give out a more reliable and
encouraging result.
Second, tests of the applicability of the two technical trading rules could not address the
cost of information and the associated opportunity costs of switching funds among
securities and other assets when considering the net returns generated by conditionally
following these rules. No information is costless, and in the real world the costs of
obtaining and analyzing information as well as the benefits of possessing particular
information is quite variant across different investors. Therefore, returns from following
technical trading rules would possibly be reduced considerably if these costs of
information could be quantified, especially in an infant stock market like Vietnams.
However, given the significance of all of the tests which have been performed, it can be
said that these tests results are capable of revealing the true level of efficiency of the
6.2 LIMITATIONS AND SUGGESTIONS FOR FURTHER
RESEARCH
82
Vietnamese stock market. The inefficiency of the Vietnams stock market as well as many
other developing and emerging markets may be explained by Grossman and Stiglitz
(1980), who posit that perfectly informationally efficient markets are an absolute
impossibility, as if markets are perfectly efficient, the return to gathering information is
zero, in which case there would be little reason to trade and markets would eventually
collapse. Rather, the degree of market inefficiency determines the effort investors are
willing to expand to gather and trade information. As such, non-degenerate market
equilibrium will arise only when there are sufficient profit opportunities, i.e. inefficiencies
to compensate investor for the cost of trading and information gathering. Such profits may
be viewed as the excess profit that accrues for the willingness to engage in such activities.
83
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