Diversification strategies for vietnamese investors

Abstract

The launch of the Vietnamese stock market in Ho Chi Minh City in July 2000 marked the transitional process of Vietnam’s economy. In recent years, the high growth potential and low correlation of the Vietnam’s emerging stock market with developed markets have attracted attention from both domestic and international investors as a source of risk diversification. Rational investors, who follow the modern financial theory with the risk-return tradeoff analysis, emphasize the importance of appropriate pricing models and trading strategies for investment portfolios. In reality, it is difficult task when it comes to pricing risky assets in emerging markets like Vietnam. The implement of traditional asset pricing models on emerging stock markets seems problematic since the hypothesis of perfect market integration does not hold. This stems from the barriers that differentiate between domestic and foreign investors. This thesis reviews the available asset pricing models and its validity in emerging countries. The empirical findings lead to conclusions of many misspecified pricing models. In that context, the model developed by Arouri, Duc Nguyen and Pukthuanthong, 2012 for partially integrated markets will be introduced as a unified theoretical and empirical framework to investigate various issues in international finance. Dynamic Conditional Correlation – Generalized Autoregressive Conditional Heteroscedasticity (DCC-GARCH) is used at empirical stages to estimate the model with the involvement of integration degree of domestic market and world price of risk. The empirical finding not only confirms the validity of the model but also unveils some interesting insights about Vietnam’s market structure. It shows that in average, the integration degree with the world market is 23% and local risk premium accounts for 78% in total risk premium. The result is reasonable in comparison with other emerging markets. Trading strategies are also developed to exploit the characteristics of time-varying integration degree of Vietnam market. The investment strategies capture the desire of risk diversification of rational investors. The empirical results on portfolio performances praise the benefits of international investment.