A cause and effect relationship between Foreign Institutional Investment Flows and Stock Market Returns. Vietnam case study

Abstract

Many previous studies has investigated the relationship between Foreign Institution Investment (FII) and stock market return in emerging markets of Asia such as Taiwan, Thailand, Korea, especially India with a lot of studies reseaching this relationship. However, some of them investigated the relationship in mean, the other focused on volatility. Wishing to have the combination research, with new approach in econometrics like VAR, multivariate GARCH, I carried out the investigation on this relationship that there has been no empirical study reseached in Vietnam market so far. This thesis tried to investigate the relationship between FII and the stock market return in Vietnam represented by Ho Chi Minh Stock market (HOSE) in mean and volatility. Data are used from year 2004-2011 including the two sub-periods of pre-crisis and during criris and found that FII caused the stock market return in all periods in mean; the stock market return caused FII only during crisis. Regards to volatility, there was no long-term effect between the two series. FII had short-term effect to the stock market return, especially during crisis.