Group membersDao Ngoc Quynh NguyenSB60485

Nguyen Thi Thu HoaiSB60476

Pham Thi Ngoc ThuySB60456

Phan Phuong TuongSB60561

Truong Cong SangSB90199

SupervisorMr. Tran Minh Phang

THE IMPACTS OF FOREIGN SECTOR (FII) ON LIQUIDITY OF VIETNAM STOCK MARKETHochiminh CityMay 2015Bachelor of Financial & Banking Thesis

ACKNOWLEDGEMENT

ABSTRACT

TABLE OF CONTENTACKNOWLEDGEMENT2ABSTRACT3TABLE OF CONTENT4LIST OF ABBREVIATIONS7LIST OF FIGURES8LIST OF TABLES9CHAPTER 1: INTRODUCTION101.1 Topic background101.2 Problem statement131.3 Research objectives131.4 Research questions131.5 Research scope141.6 Methodology and data overview141.7 Conclusion141.8 Thesis outline15CHAPTER 2: LITERATURE REVIEW162.1 Review stock market of Vietnam162.1.1 Stock Exchange introduction162.1.2 History and developments of Viet Nam Stock Market182.2 Related concept232.3 Literature of liquidity232.4 Liquidity measure252.4.1 One-dimensional measurement252.4.2 Multi-dimensional measurement272.5 Literature of Unit root test282.6 Literature of VAR292.7 Literature of Granger Causality292.8 Liquidity empirical research302.9 Conceptual Framework35CHAPTER 3: RESEARCH METHODOLOGY363.1 Methodology Overview363.1.1 Research Philosophy363.1.2 Nature of Research373.1.3 Research Approach373.1.4 Research Method383.1.5 Research Strategy393.1.6 Time horizon393.2 Data Collection Method403.3 Process of analyze403.4 Data Analysis Methods413.4.1 Unit Root Test413.4.2 VAR Model423.4.3 Choosing Lag Length433.4.4 Granger Causality433.4.5 Amihud Illiqudiity453.5 Detections for regression model463.5.1 Autocorrelation463.5.2 Multicollinearity473.5.3 Heteroscedasticity483.6 Ethical Consideration and Limitation48REFERENCE50

LIST OF ABBREVIATIONSAPECAsia-Pacific Economic CooperationFDI Foreign Direct InvestorsFII Foreign sector/Foreign Indirect InvestorsHNXHanoi Stock Exchange HOSEHochiminh Stock ExchangeVND Vietnam DongWBWorld BankWTOWorld Trade Organization

LIST OF FIGURESFigure 1Foreign Indirect Investment inflows into Vietnam Stock Market 8 Figure 2FII activities in Vietnam Stock Market from 2007 to 2014 14Figure 3Vietnamese stock market VN Index from 2007 to 2009 16Figure 4The data of daily VN-Index from 2010 to 2014 18Figure 5Theoretical framework 35Figure 6Research approach 37Figure 7Process of data analysis 41

LIST OF TABLES

CHAPTER 1: INTRODUCTION1.1 Topic backgroundVietnam is an attractive market for foreign investors because of the favorable conditions in terms of economic and policy mechanisms. When considering the role elements affecting to the development of the nations, foreign capital investment is necessary for developing country as Vietnam. This capital consists of foreign direct investment (FDI) and foreign institutional investment (FII). While FDI has a role to improve manufacture, FII has the role of encouraging financial market to expand the scale, improves efficiency of operational and increasing evidences. The structure of FII into Vietnam last time primarily focused on stock trading segment. The stock capital was maintaining positive at the high levels, a key component of this scale is the funds of foreign investors investing in secondary market transactions.The milestone of foreign indirect investment to Vietnam includes two mains stages. The first stage is the period from 1991 to 2002. Although Vietnam had not have stock market, but FII appeared from the early 90s with 7 funds and total capital is around 400 million USD (Source: IMF). In this period, the Asian financial crisis (1996 1997) occurred and led the prices of listed funds fell sharply compared to net asset value. This crisis also affected on foreign portfolio investment until 2002. For example, there were not any new investment into Vietnamese market and the funds narrowed 90% size of capital from 2000 to 2002. Specially, in July 2000, Vietnam had opened the secondary stock market.The second stage begin from 2003 to present: FIIs in Vietnam rebounded and grown overtime; hit a point from 2006 to 2007. According to ANZ report; from 2001 to 2006 FII was approximately 12 billion and in 2007 reached 5.7 billion USD (Source: IMF). Because in that time Vietnam became the official 150th member of WTO and the host of 14th APEC; Vietnam had a chance to become the attractive destination for foreign investors over the world. However in 2008, due to bad effect of the global economic downturn, the value of shares on the stock market plunged; the amount of FII into Vietnam market fell sharply, while the many foreign investors withdraw capital from the stock market Vietnam. In 2009, FII continued falling down around 71 million USD (1,500 billion VND). By 2010, with the restoration of the world economy, the amount of FII into Vietnam's stock market surged. In 2012, foreign investors bought stock with an amount of 4,600 billion VND in both Hanoi and Hochiminh Stock Exchange. In Hochiminh stock market, the net purchase value increased nearly 3 times compared to 2011 contributed to the increase in the share capital in 2012 to nearly 1,900 million VND.By the end of 2013, the volume of FII did not change significantly total capital of stock maintain around 1,800 million, lower than 2012, while the value traded separately on the two stock markets, foreign investors bought gross 315 million USD (nearly 6,650 billion VND). Particularly 2014, total funds from foreign investors in Vietnam stock market were still positive; although lower than last year. However, withdrawing capital from Vietnam was just the temporary trend. Total FII bought stock is 4000 billion VND included 2,843 billion VND on Hochiminh stock market and 1,110 billion VND on Hanoi stock market in 2014. In fact Vietnam stock market, FII has always occupied a proportion of the whole market around 10-15% and has an impact on the trend of VN-index and HNX-index. In 2015, belong to ANZ forecast, hard to large expect on the outlook and volatility on the stock market of Vietnam. Report on January 2015 of BSC, the foreign capital inflows decrease sharply compared to the same period of 2014; net buying around 99 billion on HSX and net sold around 178 billion on HNX. However, the investors can expect about room allocation for foreign investors of the Vietnamese government and Government continued equalization of state enterprises, it is likely that stock market will attract attention and VN-index will rise much. Although there are many authors who have conducted and concluded about the impacts of liquidity, as Amihud and Mendelson (1986) shown that liquidity has significant impacts on market return. Research by Mingfa Ding, Birger Nilsson and Sandy Suardi (2013) indicated that there is a negative relationship between the participation of FII and market liquidity over time. In reality, the characteristics of FIIs effects on financial markets as if financial market grows, liquidity will be higher as attracting the interests of foreign investors. Moreover, FIIs can help increase the capital of local enterprises, make businesses grow and enhance competitiveness, this is the reason FIIs are very important for the local businesses, which are undercapitalized.

Figure 1. Foreign Indirect Investment inflows into Vietnam Stock Market (Source: State Bank of Vietnam Unit: billion VND)1.2 Problem statementThe investment of foreign investors help the firm improve their ability in operating business, encourage them to enhance their quality to attract more and more investors. Therefore, FII has an important role for developing country, such as Vietnam, India or Malaysia. Analyzing the activities of foreign investors to understand their influence to the stock market plays an important role in this research. From that point, there are various solutions in order to exploit and develop the positive impacts, as well as prevent and minimize the negative impact of foreign investors. In addition, there are a few substantial researches about this relationship on stock market. Therefore, these are critical reasons to examine the influence of FII on liquidity. 1.3 Research objectivesThis research focuses on measuring the effect of FIIs activities to the market. By analyzing the data collected and solving research problems, this study has some objectives as: 1. To make an overview about the impacts of FII on liquidity of Vietnam stock market. 2. To give some descriptive statistics and analyze the relationship between FII and liquidity of stock market in Vietnam. 3. To draw the conclusion and suggest recommendations about the effect of FII to Vietnam stock market. 1.4 Research questionsBased on the purpose of finding out the impacts of foreign investors on liquidity and some objectives above, the research aims to answer two questions:- Do FII affects Vietnam stock markets liquidity?- How does foreign sector impact on liquidity of Vietnam stock market? 1.5 Research scopeThe target of this research is to investigate the impacts between FII and liquidity in stock market of Vietnam. The database that used in this research includes the daily trading of foreign investors from 01/01/2010 to 30/06/2015 based on the data of HOSE.1.6 Methodology and data overviewIn this paper, the method mainly use is quantitative approach with secondary data from stock market of Hochiminh Stock Exchange (HOSE). Besides, author also use data from some previous researches and related theory will also be employed to determine the most suitable theoretical framework.In addition, the researcher will use statistical software to run some statistical test. For example, to test the hypothesis to determine the impact or run some model as VAR, Granger Causality and Impulse Response Function (IRF) to check the theoretical framework.1.7 ConclusionIn summary, chapter 1 shows an overview about the topic research, in which introduces the important role of foreign sector and their influence on the stock markets liquidity. The research will answer the question How does foreign sector impact on liquidity of Vietnam stock market? This question would support to find evidences and give some recommendations for investors in Vietnam stock market. In addition, helping investors keep away from negative impacts or suddenly shock of market. This chapter also indicate about the structure, methodology and data of thesis.1.8 Thesis outlineThe research include five main chapters: Chapter 1: Introduce about the topic background, identify the research objective, research question, the research scope and methodology. Chapter 2: Review of literature related to the research question and selected theoretical model(s) applied in the study. Chapter 3: Illustrates the methodology applied to carry out the research Chapter 4: Present data analysis and model; analysis and discussion of findings relative to the literature review. Chapter 5: Summary the data and keys that answer the research objectives and give some useful recommendations.Besides that, appendix and reference are also presented in the end of research.

CHAPTER 2: LITERATURE REVIEW2.1 Review stock market of Vietnam2.1.1 Stock Exchange introductionFrom 2007, Vietnam has two main official Stock Exchanges called Hochiminh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX). Securities are evidences confirming the rights and legitimate interests of the owners of assets or capital of the issuers. Securities shown in the form of certificates, book entry or electronic data, including the following categories as stocks, bonds, fund certificates or rights to purchase shares, warrants, options, put options, futures contracts, securities or indices.In the current situation of economy, the stock market is conceived of as the place where the trading activities of medium and long-term securities. The acquisition is carried out in both primary market and secondary market. The Initial Public Offering of bonds and stocks to investors is done in theprimary marketand succeed trading is done in the secondary market. Thus, the stock market is the place where the exchanges, trade, transfer of securities occurs, thereby changing the securities holders.Stock Exchange has a variety of functions and highly important roles for the economic development of a country. The stock exchange has function of attracting idle capital invests for development, integrating world economy or adjusting macro situation. Creating and raising capital for the national economy is a role of stock exchange through selling shares to the investing public. The other role of stock exchange is creating conditions for enterprise to use capital more efficiently and flexibility, for example give the opportunities for small investors to take part in the growth of large companies by buying an amount of shares. Stock market is also a business assessment tool and predicts future, through the stock market, firm can adjust the stock price fluctuations or maintain the stock indexes which are the indicators of the general trend in the economy.: Current price of the stock i: Outstanding volume (volume listing) of stock i: Price of share i in the base period: Outstanding volume of stock i in the base period

Index formula

On 11-7-1998 Government signed Decree No. 48/CP issued on securities and stock market and Vietnam stock market was born. Hochiminh City of Trading Center (HoSTC) is established under Decision No 127/1998 / QD-TTg dated 07/11/1998, and in Hanoi on 03/08/2005. The first transaction of HoSTC started on July 28th 2000 there were just two firms listed: Saigon Cable & Telecommunication Material Joint stock company (SAM) and Refrigeration Electrical Engineering Joint stock company (REE). Through 7 years, Vietnamese stock market has significantly increased amount of company listed, market capitalization and trade volume. Additions, stock market also had some fluctuations, such as the Vietnamese stock index (VN-index) reached its peak in March 2007 but then declined. After that, there was a rapid decline in the investors trust in Vietnam stock market. The market has started gaining back the investor trust since the middle of 2009. Through 14 years VN-Index reached the top at 1.170 points on 12th March 2007 and after 7 years this number just goes around 600 points.On 30th June 2014 amount of trading transaction was 1,977,047 billion VND, the government investment trade transaction was 250,596 billion VND.

Figure 2. FII activities in Vietnam Stock Market from 2007 to 2014(Source: HOSE Unit: billion VND)2.1.2 History and developments of Viet Nam Stock MarketPeriod 2000 - 2006: The capital of 2 listed company was 270 billion VND and it had some government bonds are traded. From then until 2005, the market is always in a state of drowsiness, eliminate fever in 2001. Awakening stage appearance gradually from 2005 when the proportion held by foreign investors was raised from 30% to 49% (excluding the banking sector). By the end of 2005, total value of Vietnam stock market reached nearly 40,000 billion VND. Vietnam stock market had 4.500 billion VND shares, 300 billion VND fund certificates and 35,000 billion VND of government bonds, local government bonds, and attracted 28,300 trading account. In 2005, growth of the stock market doubled compared to 2004.The stock market grew spectacularly, with the VN-Index rose from 305 in 2005 to 751 at the end of 2006; the VN-Index equaled 246% compared with the VN-Index 2005. In 2006, market growth rates jumped, 31/12/2006 number of shares listed in the stock HOSE is 106, the market had 74 companies listed on HOSE, including the numbers of listed companies had been particularly strong in the last two months. The scale of market capitalization also increased significantly, while the total market capitalization reached VND 221,156 billion, equivalent to 14 billion US dollars by 22.7% of GDP. The total market capitalization has increased by 28.8 times in 2006.Period 2007 - 2009: in 2007 the capitalization increased primarily due to the volume factors more when there are new companies listed. As of 28/12/2007, the total market capitalization of approximately 493 billion VND, accounting for 43% of GDP. In 2007, Vietnam joined in WTO. HOSE has carried out 248 sessions with nearly 2.390 billion of the total volume of securities, respectively worth 244,670 billion VND; averaging 986 billion VND/session. As of 31/12/2007 with over 7,500 transaction accounts belonging to foreign investment volume, increased 3 times compared to 2006. Foreign investors held from 25-30% of the shares of the listed companies, trading revenue accounted for approximately 18% of the whole market. Value their portfolios on the official market was estimated at $ 7.6 billion, more than 3 times compared to 2006 ($ 2.3 billion); if you count the unofficial market, this figure is estimated to reach nearly $ 20 billion. According to the State Securities Commission in Vietnam (SSC), in 2007 there were 179 companies licensed to offer 2.46 billion shares to the public, respectively consisting of over 48,000 billion VND (25 times more than in 2006). The global economic recession and the collapse of major international financial institutions in 2008 undoubtedly had seriously negative influence on the health of domestic securities market. After hitting its all-time high of 1,171 points in March 2007, VN-INDEX plummeted to the bottom of 235 points, the lowest point ever since 2006. From the position of the best performance stock market in 2006, Vietnam was proclaimed to be the most risky stock market in 2008 (Bloomberg, 2008).It was crowd psychology of Vietnamese investors that further made stock market down and resulted in bigger losses (Nguyen.T, 2008). That showed the real that the investor have the tendency to behave the same as majority of people without their own careful judgment or consideration. In that time. Stock market was the emerging market, one-third of total was securities investors and two-third was individual investors. The lack of experiences and knowledge had affect them to imitate the crowd investment decisions. When the stock market was overheated in 2007, witnessing the fact that number of people had made big profit, individual investors hurried to make the Buy order, they even continued to purchase stocks, regardless the warning that Vietnamese stocks exceeded its intrinsic value by 30% at the end of 2007. As a consequence, when Vietnam stock market suffered crisis with considerably decline in value and market capitalization, most of local investors were in terribly panicking mood, they sold out stocks as fast as possible. With that massive capital outflow, the stock market condition became seriously worse.

Figure 3. Vietnamese stock market VN Index from 2007 to 2009 (Source: HOSE)Period 2010 present: With continuous support from Government, especially the stimulus package of US $6 billion in late 2009 to stabilize macro-economic conditions, local securities market gradually recovered. After constant fluctuations throughout 2010 and 2011, VN-Index climbed to the level of 400 points in 2012. In the first months of 2013, the index is traded in the range from 480 to 510 points. These signs of improvement, however, still are not enough to re-establish investors confidence. The stock trading volume at the moment was merely one third of that in 2007.In 2014, Vietnam Stock Market have very positive situation, market development with growth trend, although sometime alternating some down adjusted. VN-INDEX increased strongly in early of 2014, then create bottom from early of March and middle of May with 508 points and up top at 644 points. After that, market entered a down cycle points, nearly returned to the level of the first point in year. While, HNX also up top at 92.99 points.To date 08.12.2014, VN-INDEX reached 571.68 points, increased 13.3% compare with the end of 2013. The total transaction value of market reached 1,164 trillion VND, increased 90% compare with 2013; Average transaction value per sessions reached 5,448 billion VND. While, stock transaction value, average fund certificates per sessions reached 2,971 billion VND, greater than 2.2 times compare with 2013.Total mobilization of capital by Stock Market in 2014 reached 237 trillion VND, increased 6% compare with 2013 and contributed 27.1% to total social investment capital. Including, total mobilization value through government bond issuance reached 214 trillion VND and hold proportion 90% of total value of mobilization of capital.In brief, Vietnam stock market experiencing 13-year history of development has grown significantly and rapidly in both the number of stocks listed and value of market capitalization. The movement of VN-Index, nevertheless, has shown unpredictable instability over observed period (Figure 1.1). In addition, making investment decisions based on herd mentality rather than professional strategies is still popular among Vietnamese investors, especially individual investors.

Figure 4. The data of daily VN-Index from 2010 to 2014 (Source: HOSE)

2.2 Related concept- FII: Foreign institutional investors is an investor or an investment funds. They belong to a countries, but it is not countries which they are investment. FII include: hedge funds, insurance companies, pension funds and mutual funds. Activities of Foreign institutional investors are buying shares, stocks and bonds. FII has influence in a stock market through Gross Sale, Gross Purchase and Net Purchase. According to M.R Murthy (1999), FII could provide a high degree of liquidity and improve the function of a stock market. In the research about the liquidity of stock market in China of Mingfa D., Sandy Suardi (2013) stated that the appearance of foreign investors create an effect on liquidity by changing the trading volume in the China market. - Liquidity: It means ability which asset can convert to cash quickly and simply wherever need it. It also is degree which asset or security can be bought or sold in market without affect price of asset or stock.- Stock market: a place that contain both primary and secondary market for investors. Provide the environment to do all the activities of selling and buying stocks, bonds- Net purchase: net purchase means when foreign investors have greater buying value than selling value of stock. So, this variance is called net purchase value. 2.3 Literature of liquidityLiquidity is simply understand as the ability to convert to money of an asset. The easier and quicker convert into money, the higher liquidity of assets have. Market liquidity refers to the capacity that executive the transaction without any significant impact on the stock price. According some related research about measuring liquidity of Von Wyss (2004) or Crokett A. (2008), market liquidity usually include four aspects as: Market depth, the ability exercise large transactions without influencing prices; Tightness, or the different between bid and ask prices. According to Von Wyss (2004), tightness also can be seen as the degree of buying and selling asset in a specific time at the same price. Trading time, the time or speed of transactions that can be carried out at prevailing price. Measuring trading time is used by the postpone time between the trades, the quantity of trades in each time. Resilience, or the ability to buy or sell assets with little impacts on price.Liquidity is an important factor of a stock market, which used to measure the efficiency and growth of market. It also a strong forecaster of economic growth, predicts future returns as Bernnardo (2002) state. According to Amihud & Jones (2002), liquidity engaged in financial analyzing process and helped in providing price forecasts as well as facilitating efficient price establish in markets. Schmukler et al. (2007) indicated that liquidity is a very significant issue for an investor when deciding which investments to take. Liquidity provides safety and lessen the risk of losses in executing large volume transactions.There are a number of attributes that can impact stock market liquidity, for example the market return, volatility or participate of institutional investors. Wahal (1996) state that institutional investors also play an important role in influencing liquidity and exist a relation between them. Lakonishok et al. (1992) argued that the impact of foreign investors on stock liquidity is reinforced by the influence of their trading on stock price. In addition, the room allocation to international investors as well enhance local market liquidity. Bekaert et al. (2007) exhibit an effect from the openness to foreign investors to liquidity in emerging markets. Agarwal (2007) examined the relationship between institutional ownership and liquidity of stocks, focusing on the effect of the institutions information advantage on liquidity. He found evidence of a non-monotonic (U-shaped) relationship between the fractions of a firms shares held by institutions and various measures of stock liquidity, and showed that liquidity rises with increased institutional ownership. Chordia, Roll, and Subrahmanyam (2000) studied the US market and concluded that liquidity is not an asset specific attribute; rather, individual asset liquidity tends to be positively co-related to aggregate market liquidity. A market is liquid if the cost of buying or selling a large number of shares on demand is low. This suggests that the costs of acquiring capital are lower in more liquid markets. Thus, liquidity in the stock market has consequences for a firm's financing/investment policies. 2.4 Liquidity measurementBecause there is no specific and widely accepted definition of liquidity, it is very difficult to measure and capture liquidity. As a result, there are many ways to measure liquidity. In the research named Measuring and Predicting Liquidity in the Stock Market (2004), Von Wyss divided liquidity measurements into two methods: one-dimensional and multi-dimensional measurement. One-dimensional liquidity measure means the researchers only focus on one variable to measure liquidity, while multi-dimensional liquidity measure try to combine different variables in one measure. 2.4.1 One-dimensional measurementOne dimensional often included four type of groups: the firm size, the related volume measure, related time trading and the spread related liquidity measure. The firm size will be measured by the market capitalization, which present the firm value in the current market as:

Where is number of shares and is the price of stock. In the second group, the related volume included many ways to measure liquidity as trading volume, turnover, depth, log depth and dollar depth and many other ways. Normally, turnover is seem to be more popular and adequate because it provide a comparison between different stocks in measuring liquidity. Turnover is calculated by the price in transaction i and the quantity of share traded in transaction i by the formula:

When considering time trading to measure liquidity, Von Wyss (2004) focused on number of transactions and number of orders, which refers to the number of orders placed for a specific stock in a given time. High number of orders or transactions, high liquidity of the stock.And spread related liquidity measure is the group present the different between bid prices and ask prices with some methods as absolute spread, log absolute spread, relative spread and effective spread. In reality, investors not only concern about the fees paid to stock market and brokers in each transactions, but also interested in the cost that coincident executing orders. The lower values of spread, the higher liquidity of stock. 2.4.2 Multi-dimensional measurement As mentioned before, multi-dimensional measure refers to the combination different variables to measure liquidity. There are also a variety of ways to measure liquidity by multi-dimensional, such as Depth for price impact, Market impact, Quote slope, Log quote slope and Liquidity ratio 1,2,3 However, the most common way of using multi-dimensional to measure liquidity is Liquidity ratio 1, which is used to develop illiquidity ratio by Amihud (2002).Liquidity ratio 1, also known as Amivest liquidity ratio describes how much turnover corresponds to a unit change in the price. A high liquidity ratio means high liquidity.

Amihud illiquidity ratio (2002) or ILLIQ is reverse with liquidity ratio, which compare the absolute price change of a stock to the turnover. A low Amihud ratio denotes the high liquidity.

The liquidity of stock market is measured by the Amihud illiquidity ratio to assess the price impact in the market. In the research of Shane & Paul (2011) were calculated turnover ratio, examine the transaction cost and bid-ask spread in the market. Weekly average FII were considered to estimate the impact of FII flows on the stock market. Then, weekly average trading flows were computed from daily gross purchases, sales and net investments. The researchers found that foreign trading extraordinary improved trading activities in India. FII flows had a significant positive impact on the volume and value traded while gross purchases and sales not only impacted market liquidity negatively, but were also found to have a negative lead effect on future liquidity.2.5 Literature of Unit root testThis research is using Vector Auto Regression (VAR) Model to find out the impacts of FII on liquidity of Vietnam stock market. However, the condition to do this method is data have to be stationary, the time series data is called stationary when mean value, variance and co-variance (at different lag length) do not change with time; it means series follow a cycle that we can identify if opposite the series is not stationary; and it is said to be nonstationary.Nowadays, Unit root test is tool to test series stationary or not. There has five popular methods to test stationary of data are Augmented Dickey-Fuller (ADF) was developed by Dickey and Fuller in 1979; Dickey-Fuller Generalized Least Squares (DF-GLS) was develop by Elliott, Rothenberg and Stock in 1996; Phillips-Perron (PP) was named afterPeter C. B. PhillipsandPierre Perron done their research in 1988; Kwiatkowski, et. al.(KPSS) was introduced by Kwiatkowski, Phillips, Schmidt, Shin in 1992; and Ng and Perron (NP) in 2001. In fact, ADF and PP test are close to estimate the stationary of times series data but it may basically differ in finite samples by the different ways in which they evaluate for autocorrelation in the test regression. Indeed, Schwert (1989) found that the result of ADF and PP test are size distorted, it makes the result rejects the null hypothesis many times while its true. In addition, the research of Caner and Killian (2001) also found that KPSS unit root test has the same problem with ADF and PP test. So, they have low power to test the stationary of time series. In 1996, ERS unit root test was developed by Elliott, Rothenberg and Stock as the modification of ADF method to mitigate the size distorted. Moreover, Ng and Perron (2001) applied the procedures of GLS detrending of Elliott, Rothenberg and Stock to build an efficient version of PP unit root test which also fixed their own problem about size distorted. In summary, for maximum power of unit root test method, ERS and NP are efficient method to test the stationary of time series data. Therefore, this research uses ERS unit root test to test data stationary or not.2.6 Literature of VARThe VAR model known as Vector auto-regression are used to analysis and forecast the multivariate time series. It is the model which generalized form of univariate autoregressive model to dynamic multivariate time series. VAR models in economics were made popular by Sims (1980). The definitive technical reference for VAR models is Lutkepohl (1991), and updated surveys of VAR techniques are given in Watson (1994) and Lutkepohl (1999) and Waggoner and Zha (1999). Applications of VAR models to financial data are given in Hamilton (1994), Cuthbertson (1996), Mills (1999) and Tsay (2001). Besides that in 2012 Paul Chopra and Ajay Rajut also use this models to checks the stationary or non-stationary. This model is simple and flexible. The users do not worry about how determine which are endogenous variable and exogenous variables. All the variables in VAR is endogenous variables. The single estimate is OLS method can be applied to each separate equation displacement. The forecast by this method is better than other forecast which calculated from simultaneous equations model complex. VAR models is the useful tool to test the correlation between 2 factors FIIs and liquidity.2.7 Literature of Granger CausalityGranger Causality Testing was developed by Clive Granger in 1969, which is describe the causal relationship between variable in the econometric model. It is one of the good features of VAR model because of the ability of one variable to predict the other (Asteriou, 2007). The basic concept of Granger Causality is that if variable X contains useful information for predicting variable Y, then variable X causes Y. That is X is Granger causality of X. There are four cases of causality: Unidirectional causality from X to Y, Unidirectional causality from Y to X, Bilateral causality, or feedback, Independence.2.8 Liquidity empirical research Although there are several studies have found that the impact of foreign sector on stock market parameters such as market return, volatility, but there is a little prior research examined the impact of foreign sector on liquidity of stock market. In 2009, S. Ghon Rhee, Jianxin Wang have used daily stock trading of listed firm in Indonesia stock market in the period 2002-2007, it includes daily holdings of investors, volume of trading, value of trading, bid ask prices, high, low and closing prices. Based on this data set, they used it to measure liquidity by three methods, which are bid-ask spread, price sensitivity and market depth. By using Granger causality testing to examine the relationship between foreign institution investment and liquidity, S. Ghon Rhee and Jianxin Wang (2009) concluded that foreign investments have a negative impact on liquidity of Indonesia stock market. This study stated that if foreign holdings increase 10% in the current month, it would lead to bid-ask spread increase by approximately 2%, market depth drop by 3% and price sensitivity rise by 4% in the next month. In recently, Prasanna and Bansal (2014) investigate the relationship between Foreign Institutional Investment and liquidity of India stock market. In order to examine this effect, they collected daily data of gross sales, gross purchase and net investment as proxies for FII. Besides that Prasanna and Bansal have applied several methods to measure liquidity such as trading volume, turnover, turnover ratio, illiquidity ratio and spread. Based on these proxies, they used OLS regression estimates to find out the correlation coefficients of FII and liquidity measures. Moreover, in order to understand more clearly the causes and effects relationship between FII flows and liquidity of stock market Prasanna and Bansal also applied Granger causality to test and the result show that net investment has a significant positive impact on liquidity whereas higher gross purchases and gross sales have substantial negative impact.

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No.Report nameAuthorsYearNationDependent variableResult of the research

1The Role of Foreign Blockholders in Stock Liquidity: A Cross-Country Analysis Lilian Ng, Fei Wu, Jing Yu, and Bohui Zhang 2011- The average percentage effective spread -Percentage relative spread for firm i in month t - Amihuds illiquidity ratio - Turnover Liquidityi,t = 0 + 1F Oi,t1 +2Ret 12mi,t + 3RV oli,t + 4ADRi,t + 5Indexi,t+6DYi,t + 7BMi,t + 8Sizei,t + Other controls + t, Negative and Positive Relationship between foreign block ownership and stock liquidity

2Foreign Institutional Investors and Stock Market Liquidity in China: State Ownership, Trading Activity and Information Asymmetry Mingfa Ding, Birger Nilsson, Sandy Suardi2013China-The relative quoted spread (QS)-The relative effective spread (ES) - Amihud (2002) price impact measure (ILLIQ).

A negative relationship exists between the participation of foreign institutional investors and market liquidity over time.

3Foreign institutional ownership and stock market liquidity: Evidence from Indonesia Rhee, S. Ghon, and Jianxin Wang 2009Indonesia-Bid-ask spread-Price sensitivity-Market depthThe negative liquidity impact of institutional investor ownership in developed markets.

4Foreign Institutional Investment in Indian Capital Market: A Study of Last One DecadeNarendra Singh Bohra and Akash Dutt2011India Negative and Positive relationship.

5Do Foreign Institution Improve Stock LiquidityChishen Wei2010USA- Amihud (2002) price impact measure (ILLIQ). Positive and Negative relationship

2.9 Conceptual FrameworkDatabaseTurnoverVolume tradingGross saleGross purchaseNet purchasesFIIsLiquidity(Amihud 2002)VAR General testing processGranger causality Impact of FIIRecommendationsDaily data of Vietnam stock market

Figure 5. Theoretical framework (Source: authors)CHAPTER 3: RESEARCH METHODOLOGY3.1 Methodology Overview3.1.1 Research Philosophy According to Paul Flowers (2009), when authors do a research, it is important to consider different research paradigms and matters of ontology and epistemology to develop the knowledge and nature of knowledge. All research is based on assumptions about human knowledge, the nature of the realities in research and how can understand it. The philosophy will give us the overview of the topic. There are four types of philosophy, namely: Pragmatism, Positivism, Realism and Interpretivism. Pragmatism argues that in research, it must have a specific answer for the actual question. Researchers have to base on the knowledge and theory was accepted before to solve the problem of research topics by using the authentication result realistic. Positivism confirmed that accuracy knowledge springs from the empirical testing. When the author using Positivism, the research will accept the theory of the author before, then arguments and make correct statements about what the researcher pursue. Realism is related to scientific enquiry. Nature of realism is the senses lead to the truth. Two type of realism is direct realism and critical realism. Interpretivism said that it is necessary for researcher to understand the different between roles of humans through social vision position.In this study, the researchers based on available theories, then collected secondary data and analyzed the impact of FII to liquidity in Vietnam stock market to prove and develop these theories. Besides that, researcher made some assumption about some factors in our theoretical framework and modeling. Thus, pragmatism is the most appreciate method for purposes and characteristics of this research.3.1.2 Nature of ResearchAccording Saunder et al (2009), there are 3 kinds of study: exploratory, explanatory type and descriptive to analyze variables. Explanatory is used when exploring new things; to connect the ideas to explain why or how the problems happen. Exploratory is based on hypothetical or theoretical to further research, which was used when the authors has data. With exploratory authors seek to look for patterns of data to understand deeply about topic. Descriptive is more about to gain an accurate profile of issue. Descriptive require authors to have a theory to used database in the correct direction. This research follows the impact of FIIs on liquidity of Vietnam stock market. First of all, providing the overall of Vietnam stock market. Then analyzing elements of each factor: FIIs and liquidity. Next using the Eviews software and financial method to explanatory nature to squash the research question. Then reviewing and investigating the correlation between variables by statistical test like regression to get the acknowledgment about the research. So, researchers combine 2 types: exploratory and descriptive together to get the main purposes.3.1.3 Research ApproachIn this part, there are two methods to approach a study, these are: Inductive approach and Deductive approach. Inductive approach collects data; then building the pattern in order to find out the conclusion.

GeneralizationSpecific examples or activitiesInductiveDeductive

Figure 6. Research approach (Source: authors)According to Aristotle (2010), the knowledge reached through inference. There want inference must be the premise and that premise was accepted. Therefore, there is a premises relationship with very clear conclusions. Deductive approach of Aristotle (2010) that moves from the general to the particular or general rules applying particular rules. Francis Bacon (2002) gave a different approach about knowledge said that to gain new knowledge must come from the private information to the general conclusion, this method called inductive method. This method allows us to use the personal premises, is the knowledge that has been accepted as a means to gain new knowledge.It means deductive approach that moves from the general to the particular or general rules applying particular rules. Thus, deductive approach is suitable for this research. This approach tends to give a realizable results said by Babbie (2010). Beside that deductive approach is often linked with the quantitative research with the expertise. For doing this thesis, researcher choosing this approach to test against the variables and find out the relationship between them.3.1.4 Research MethodUnder the current situation, market research methodology divided into qualitative and quantitative analysis. Qualitative research is approach to exploration, described and explained based on the survey means experience, perception, motivation, intends, behavior, attitudes. In qualitative research, data should be collected primarily in the form of qualitative. Quantitative research is the researchers use different methods to measure, reflect and interpret the relationship between some factors together. It is applicable for factors can be expressed in numerical. It is shown by figures collected immediately during the survey, these numbers may be in continuous variable or incoherent.For this topic, quantitative research is the most accurate methods. Quantitative method for the secondary data from HOSE stock market is more compatible and accurate. The researchers use different methods to measure, reflect and interpret the relationship between some factors together. For detail, authors gather numerical data, then using formula and model to measure, compare and give specific conclusions about the impact of FII to liquidity in Vietnam Stock Market.3.1.5 Research StrategyThe research strategy is general plan how adopting to reply the research question and guide the choice of research question and thesiss objective said by Saunder (2009). There are five strategies: experiments; case study; survey; archival; and historical research. Based on the research questions and objectives, archival research strategy is the best for this study. The reason is researchers access the administrative records and documents to collect database such as daily price, VN Index, trading volume from 2010 to middle 2015 on the official data. Archival allows authors to concentrate on the correlation and effects of variables in HOSE. Thus, archival strategy is meet researchs objective which will be adopted to define the impact of FIIs on liquidity of Vietnam stock market.3.1.6 Time horizonTime horizon is the length of time for a project what observing. Cross-sectional and longitudinal studies are two types of time horizon. According to Saunders et al. (2009), the cross-sectional, which also call snapshot at a particular time. In the other hand, longitudinal takes a series of snapshots or a diary to represent events over a given period. Advantages of longitudinal time are tending to research about the changes of development. The sample for longitudinal is the way to analyze the past return database for given stock to help researchers have a clear view about the Vietnam stock market. Thus, in this study authors use longitudinal and the data is collected in 5 years period from 2010 to middle of 2015.3.2 Data Collection MethodThis research collects data directly from the website of HOSE: http://www.hsx.vn and the website of Stockbiz Portal: http://www.stockbiz.vn which are covered in 5 years and 6 months from 4th January, 2010 to 30th June, 2015. From the databases, researchers get daily data is related to VN-index, foreigners trading and the market capitalization. The total observations are 1374. All collected data will described in table on Excel file, it is listed out day by day from 4th January, 2010 to 30th June, 2015 as below: Closed price of VN-Index Total trading volume of VN-Index Total trading value of VN-Index Total buy volume of foreigners Total buy value of foreigners Total sell volume of foreigners Total sell value of foreigners3.3 Process of analyzeIn this research, VAR model is the main model to test the impacts of FII on liquidity. The requirement of VAR model is the stationary of variables, so first of all, the researchers need to test whether the variables are stationary or not by using Unit root test before applying VAR model. In this step, the researchers chose Phillip-Persons Test to check the stationary of variables after considering among many unit root test methods. Then, lag-length is another requirement of VAR model to identify the relationship between FII and market liquidity. Akaike Information Criterion (AIC) will be used to identify the lag-length in this paper. After that, the Granger Causality Test will be applied to find out whether liquidity has any effect on Gross Purchase, Gross Sale or Net Purchase of foreign investors.

Figure 7. Process of analyze (Source: authors)3.4 Data Analysis Methods3.4.1 Unit Root TestAs this research mentioned in chapter two, the main condition before applying VAR model or Granger Causality, unit root test is use to test of stationary or non-stationary This research will conduct ERS test to do the unit root test. The hypotheses of this test are: : Y has unit root meaning that variable is not stationary : Y do not have unit root meaning that variable is stationaryIf the test statistic is lower than the critical values at the significant level 1%, 5% and 10%, cannot reject. On the contrary, If the test statistic is higher than all of the critical values at a significance level 1%, 5% and 10%, will be rejected and accept . After determining the time series is stationary, this research can apply VAR model. However, in some case, the time series data is not stationary at level, the research have to transform non-stationary time series into stationary at 1st difference or 2nd difference.3.4.2 VAR ModelVAR model known as vector auto regression model which is a generalized form of univariate autoregressive model for forecasting a series of variables. In other words this is a vector of time series variables. VAR estimates each equation bases on the lag length of variable (p) and other variables in a simple way. The model used to define the correlation between FIIs and Amihud (presented for liquidity):

In which:: Amihud liquidity ratio on day tFII: Foreign indirect investment: gross sales; gross purchase, net purchase on day Constant Correlation coefficientsk: number of lags that has been analyzed: zero-mean white noise disturbancesAssuming that each equation includes lag length values include: (k) lag length for both FII and liquidity as variable to regression. In this case, using OLS to estimate each equation. With () is the random error, it also called thrust or innovation in VAR language.With some of the lag length variables, each coefficient will no statistically significant, possibly due to multicollinearity. In regression coefficients FII, there are only the FII which has lag length is 2 is statistically significant, while the remaining coefficients cannot. Addition, the result in the regression of Liquidity is same to FII.3.4.3 Choosing Lag LengthLag length is a value that use to forecast the lag of independent variables based on the lag of other dependent variables. Omer Ozcicek and W. Douglas McMillin (1999) stated that specify lag length is a critical factor in the estimation of VAR models. Ltkepohl (1993) found that in comparison with true lag length, choosing a higher order of lag length can cause an increase in the mean square forecast errors and generate autocorrelated errors when choosing lower order of lag length. Hafer and Sheehan (1989) find that the different in lag lengths could make the accuracy of forecasts from VAR model changes significantly. In this research, the authors choose Akaikes information criterion (AIC) is a tool to estimate lag length of VAR models. 3.4.4 Granger CausalityIn order to find out the cause and effect of two stationary variables, the study will often asked question: Is it liquidity (Y) that causes FII (X) or is it the FII that causes liquidity of Vietnam stock market. The pair of regression involves estimating causality: (3.1) (3.2)To determine whether causal relationship between X and Y variable or not, the authors will test hypothesis for each equation above:

Using F-statistic of Wald test to investigate null hypothesis, if F-statistic is higher than critical value at the significance level, will be rejected and reverse. According to Gujarati (2004), there are four probabilities: Unidirectional causality from X to Y is exists when the estimated coefficient of X is statistically different from zero () and estimated coefficient of Y is not statistically different from zero (Unidirectional causality from Y to X is indicated if the estimated coefficient of X is not statistically different from zero () and estimated coefficient of Y is statistically different from zero (Bilateral causality, or feedback is happened when the estimated coefficient of X and Y are statistically significantly different from zero in both equations ( )Independence is suggested when the estimated coefficient of X and Y are not statistically different from zero in both equations ( )3.4.5 Amihud Illiqudiity This study based on Amihud illiquidity measure (2002) to identify the impact of FII on liquidity. The method of Amihud included three main steps. First of all, the researchers will collect data of Vietnam stock market to calculate Turnover () as the formula below:

In which, turnover is daily trading volume in VND, Pi is price in transaction i and Qi is the quantity of share traded in transaction i.Then, the researchers will come to calculate the daily return of stock in market by the equation: In detail, is the closed price of today and is the closed price of the day before. After that, the Amihud Illiquidity ratio will be calculated by the absolute daily return and turnover as the formula:

3.5 Detections for regression model3.5.1 AutocorrelationWhen the time series data is affected by its own signal in the past, it is called autocorrelation or serial correlation. This means that an error had been existed at period t may be had again to the next period t+1. And autocorrelation usually occurs in time series data.According to Mwirigi Kiula, 2014, there are three main reasons to have autocorrelation are omitted variables, misspecification and systematic in errors measurement.Omitted variables arises in case of the model C depend on 2 variables are A and B, but the real number only has A or B, so C just affected by A or B, so it is called omitted variables. In many time series data, the thing that lack some series is existing usually because of statistic, so omitted variables is the popular reason for autocorrelation; Suppose A is related by B and squares of C, but the real calculation wrongly assume only B and C, so this mistake is called misspecification. Systematic in errors measurement is usually happens when the system is updated and some of data cannot update like the others, so it makes the hold systematic doesnt link to each other.When the data has autocorrelation inside, OLS estimators are still linear and unbiased, but the result is not the best, it is inefficient. The regression coefficients are also unbiased; it makes standard errors of regression coefficients underestimate; and the range of confident interval of t-statistics and F-statistics are bigger. There are two popular ways to detect autocorrelation are graphical method and formal tests (Mwirigi Kiula, 2014). With formal tests in Eviews, it has the Durbin Watson Test, the Breusch-Godfrey Test, and the Durbins h Test (for the presence of lagged dependent variables). This research uses the Durbin Watson test to detect autocorrelation and fix it for the best estimation which integrates in unit root test result, when the Durbin Watson test is bigger than 2, times series have no autocorrelation and opposite. 3.5.2 Multicollinearity Muticollinearity arises when two independent variables have a high correlation. It exists which makes the result of regression model wrongly by changing the standard error. Collinearity (or multicollinearity) is the undesirable situation where the correlations among the independent variables become stronger than the others (Central Michigan University, 2014).Multicollinearity can be caused by use incorrectly of dummy variables (like exclude wrong category); include an independent variable that is computed from other independent variables in the equation (A = B + C, and the regression includes both A, B and C) or use one variable twice times but in different unit of measure (High in feed and high in meter)The equation of t-statistics is

And the absolute of t-statistics and p-value is always opposite. It means, when the multicollinearity increases the standard error, it makes t-statistics decrease. Therefore, p-value will increase. In addition, when p-value is higher than 5% (0.05), the variables become insignificant while it may be not insignificant. So, multicollinearity makes the result after estimation worse.To detect the multicollinearity, Eviews provides a tool to run correlations analysis using all independent variables in the estimate equation to test is there exist multicollinearity or not. After detect the problem, once that has high correlation will be drop it out from the equation and run this model again to have the final result. In this document, each equation just uses one variable to test the impact to the dependent variable is liquidity of Vietnam stock market. So, this research doesnt have multicollinearity.3.5.3 HeteroscedasticityWhen doing regression for many variable observations, the Mean Standard Errors (MSE) is calculated for the efficient of linear regression, regression is good when MSE is low and not good when MSE is high, and variances of regression are also proportional to MSE. Heteroscedasticity arises when the variances of regression are not stable. It means observations distribute with no trend and the result of regression is not efficient. To detect the heteroscedasticity in estimated regression, there have several tests to know heteroscedasticity exist (Mwirigi Kiula, 2014), for example as The Breusch-Pagan LM Test, The Glesjer LM Test, The Harvey-Godfrey LM Test, The Park LM Test, The Goldfeld-Quandt Tets, and Whites Test. This document uses White test to find heteroscedasticity if regression model with the null hypothesis of the test is there is no heteroscedasticity (or homoscedasticity). After detect the heteroscedasticity, Hossain Academy, 2011 suggested that data should convert into log and run the model with log variables; heteroscedasticity will be removed and it becomes homoscedasticity.3.6 Ethical Consideration and LimitationBelong to Saunders et al, 2012, the ethics in research are the factors should be aware when doing the research (Saunders et al, 2009). Ethical principles have been developed to realize any of ethical issues that arise in various approaches to research.All of data was requested be solely for the research intention. Source of data is acknowledged and available in public domain that is taken from Hochiminh stock market (HOSE). Ethical issues related to the analysis and reporting process: ensuring that the data is not distorted and erroneous. Data will be analyzed and reported in honestly way and secured actions to edit data to get the good results. Besides that, from an ethical standpoint, first of all we ensure that the results of the research would be useful. Our thesis respect and comply with all relevant policies. Thesis report respect all copyright laws cited documents and paper. Using data from reliable sources, books, magazines and reference material that all the information in the report is valid.Before making any conclusions about this thesis, these may have some limitations. As an external party, this research focuses on the impact between FIIs and liquidity of Vietnam stock market. Thus, the researcher may not collect full database because the stock market in Vietnam still develops and finishes. Author effort to investigate this topic. Due to limitations of essays, the research may not provide a sustainable explanation but it could serve as a guide for future in-depth studies.

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