Impacts of inflation on the Vietnamese stock market in economic turbulence

Abstract

This study employs the GARCH model to examine how inflation affects the Vietnamese stock market. The analysis uses 2001-2022 data from the General Statistics Office and the Ho Chi Minh Stock Exchange (HoSE). This time frame encompasses various market cycles, including the recent financial crises, which alter the characteristics of stock variance. The findings reveal that inflation has a strong impact on the volatility of stock indexes because the psychological herd of the stock players has a huge impact on market volatility such that it weakens the market, leading to instability due to stock prices being blown up too high or depressed too low. Herd mentality facilitates price manipulation, stock price manipulation, and speculation. When the demand for capital flows into the secondary market, a surge has led to a large amount of money in circulation. This has caused a high level of inflation. The findings indicate that a one percent increase in inflation is associated with a 6.692 percent increase in the VN index, suggesting that Vietnam’s stock market returns can hedge against inflation. Yet, the popularity of speculative investments necessitates that the Vietnamese government not only address inflation but also improve financial regulations and stock market oversight.