1. Relationship between exchange rate and stock market
Many studies try to find correlation between exchange rate and stock market. But there is still no consensus among studies because this relationship is an empirical problem. Thus, studies in markets can lead to different conclusions that may be positively or negatively correlated, or even not at all. There are theoretically three approaches to the relationship between exchange rates and stock prices:
First, the approach of Dornbusch and Fisher (1980) shows a positive relationship between stock prices and exchange rates. The two argued: once the domestic currency is undervalued, it will make domestic enterprises more competitive, resulting in an increase in their export activities. This causes the stock prices of these companies to increase. However, the results will be completely opposite if these enterprises use a lot of import costs for inputs in their products. The increase in costs in products due to an undervalued local currency can cause their sales and profits to decrease, which in turn will drive down their stock prices.
USD/VND exchange rate increased sharply when the Fed raised interest rates in 2018
Another approach using the equilibrium portfolio model of the exchange rate, Branson (1983) proved that: the relationship between exchange rate and stock price is inverse. The reason for this result can be explained from the direction of the impact of stock prices on exchange rates. In this model, individual investors hold both domestic and foreign assets (including currencies in their portfolio). Here, the exchange rate plays a role of adjusting the balance of supply and demand for assets. Once these individual investors want to buy more domestic assets, they will sell off foreign assets that are currently less attractive to them. This will lead to an overvalued domestic currency or a falling exchange rate (since the exchange rate is defined as the price of one unit of foreign currency relative to the price of another – domestic currency), so the relationship between stock prices and exchange rates is inverse. An increase in the prices of domestic assets causes investors to increase their demand for the currency, which in turn causes interest rates to rise. Another activity that also makes the relationship between stock prices and exchange rates inverse is that when there is an increase in foreign investment in domestic assets, there is also an increase in stock prices. This is also the cause of the appreciation of the domestic currency.
The period when the US launched the QE3 package, maintaining interest rates around 0% made the profitability on the US stock market start to become less attractive, investors tended to sell their portfolios in the US and capital flowed to developing stock markets.like Vietnam.This process makes the amount of USD in the market abundant (decreased exchange rate), which is the basis for the State Bank to purchase foreign currency and supply domestic currency (expansion monetary policy).Help VNINDEX increase strongly
When approaching the exchange rate as an asset (price of a foreign currency unit) in the asset market, Gavin (1989) in the monetary model asserted that the exchange rate and stock price have a weak or complete relationship. unrelated. Like the prices of other assets, the exchange rate is also determined by the expected future rate. Any factor that affects the future value of an exchange rate will affect the present rate. The factors that cause changes in exchange rates can be different from those that cause changes in stock prices, in which case there will be no relationship between the assets. When there are several factors that affect both stock prices and exchange rates, we would expect that there is a relationship between the two variables. Non-relationship occurs when: the domestic currency is undervalued to enhance the value of commodity exporters, but if these enterprises import a lot of input costs abroad, the stock price may be affected. will not increase, then the cost of the enterprise's product will increase, making the enterprise less competitive. On the other hand, enterprises that do not export their products to other countries but import raw materials may have their share prices fall when the domestic currency is undervalued which can cause revenue loss. or their profits decrease.
2. The policy system has a great impact on the stock market itself and the activities of enterprises.
Each policy change can lead to good or bad effects on the stock market, especially in difficult times.
For example, Vietnam has issued a policy to protect the steel industry for a certain period of time to help steel enterprises compete with cheap steel prices imported from China. Thereby improving operational efficiency and achieving good business results
The socio-political environment always has certain impacts on the operation of the stock market. Political factors include changes in the government and political activities, and policy changes have a great influence on the stock market. Political, social and military fluctuations are non-economic factors but also have a significant influence on stock prices in the market. If these factors have the ability to positively affect the business situation of the enterprise, the stock price of the enterprise will increase.
For example: For countries with unstable political situations, it will often lead to an unhealthy economy, businesses that do not perform well, making ttck not develop.
The legal environment should be considered from the following angles:
How is the legal corridor system of the stock market built?
Sufficient protection of investors' legitimate interests is available.
For example: With the improved legal framework, it will help to make the information published to the outside clear and transparent. Investors also have easy access to more secure and accurate reliability, from which the capital inflow into the stock market is getting bigger and the stock market is growing.
The incentives and limitations are specified in the legal system. And the stability of the legal system, the possibility of modification and their influence on the stock market.
SOURCES:
Huynh, T. N., & Nguyen, Q. (2013). Mối quan hệ giữa tỷ giá hối đoái, lãi suất và giá cổ phiếu tại TP.HCM. Tạp Chí Phát Triển và Hội Nhập, 11(21), 37–41.
Nguyen, T. L. H., & Luong, T. T. H. (2014). Mối liên kết động giữa tỷ giá hối đoái và biến động thị trường chứng khoán các quốc gia mới nổi ASEAN. Tạp Chí Phát Triển và Hội Nhập, 17(27), 31–35.
Dang, V. C. et al. (2020). Linkage Between Exchange Rate and Stock Prices: Evidence from Vietnam. The Journal of Asian Finance, Economics and Business, 7(12), 95–107. https://doi.org/10.13106/JAFEB.2020.VOL7.NO12.095
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