University of Economics Faculty of Postgraduate --- oOo ---

Multifactor Models: Binh Minh Joint Stock Company Case

Lecturer Class Student Tel:

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Dr Phm Hu Hng Thi eMBA Hunh Anh Kit 0909262782

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TABLE OF CONTENTS
A. B. C. D. E. F. ABSTRACT............................................................................................................................... 2 METHODOLOGY.................................................................................................................... 3 EMPIRICAL RESULTS .......................................................................................................... 4 CONCLUSION.......................................................................................................................... 6 REFERENCES .......................................................................................................................... 7 APPENDIX ................................................................................................................................ 8

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ABSTRACT
The capital asset pricing model (CAPM) of William Sharpe (1964) gives the birth of asset pricing theory. Nowadays, The CAPM is still widely used in applications, such as estimating the cost of capital for firms and evaluating the performance of managed portfolio. In the early empirical work, the Black (1972) version of the model, which can accommodate a flatter tradeoff of average return for market beta, has some success. But in the late 1970s, researchers begin to uncover variables like size, various price ratios and momentum that add to the explanation of average returns provided by beta. The problems are serious enough to invalidate most applications of the CAPM. We need factors, sources of priced risk, beyond changes in the market portfolio in order to explain cross sectional variations in average returns. Multi-factor models extend the CAPM precisely in this sense, attributing high average returns to positive correlation with additional risk factors other than movements in market risk. Merton (1973) was the first showed that the CAPM could be extended to allow for multiple sources of systematic risk. Fama and French (1993) motivated by an attempt to explain the size and value CAPM anomalies (observed by Banz (1981) and Rosenberg (1985), respectively) construct their multi-factors model (three factors model) contained three stock market factors: an overall market factor and factors related to firm size and book to market equity. Fama-Frenchs three-factor model largely captures the average returns on U.S. portfolios formed on size and book-to-market, but also on other variables known to cause problems for the CAPM (earnings/price, cash flow/price, past sales growth and long-term past returns). In this article, the author try to construct a multi-factors model to calculate the sensitivity of a securitys returns to the economics factors.

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METHODOLOGY
Similarly to Fama and French (1993), I test the multi-factor model using the time series regression approach. since it allows to capture the variation in the different factor loadings and to identify the sensitivity of a securitys returns to the economics factors. In a time-series regression a correctly specified model produces intercepts that are not significantly different from zero. Thus, the estimated intercept provide a simple formal test for comparing the performance of different asset pricing models. The three factors model of Fama and French (1993) attempts to explain the returns for 25 stock portfolios formed on the basis of size and book-to-market equity. The explanatory variables are the returns on a market portfolio and mimicking portfolios for size (ME, i.e. market capitalization) and book-to-market equity (BE/ME, i.e. book value relative to stock price). The market factor is proxied by the excess market return, RM-RF, where RM is the return on the value-weighted portfolio of the stocks in the six portfolios above. RF is the one-month Treasury bill rate. To apply the FF-model, I used an index model to estimate the market portfolio returns because the index model is easily measured and unambiguous in Viet Nam Stock Exchange. In addition, instead of using the firm size and book to market equity of the Fama and French model, I use the Consumer Prices Index (CPI) of the Viet Nam economics and exchange rate D:US$ (FX) to test the correlation between these two factors to the excess return of a chosen security. The reason for choosing these two factors is that consumer price inflation of Viet Nam appears to be an economics problems at this time, standing at 23.15% in Oct 2008, with food prices still up by around 40% on a year-on-year basis. Moreover, with the State Bank of Viet Nam exchange rate policy always try to decrease the value of Dong to encourage export, US dollar has become one of reliable asset for investment in Viet Nam. By choosing the above factors for my multi-factor model, the observable excess return is described by the following multifactor relationship:

E(ri) = i + imRm + icpiRcpi + ifxRfx + ei (1)

With: E(ri) = Ri - Rrf i is the stocks excess return if the market factor is neutral. Rm = Rvnindex - Rrf Rcpi is the increase or decrease in the consumer price inflation over the investment period Rfx is holding period return of US$ depend on the increase (or decrease) in the exchange rate D:US$ over the investment period ei is the component attributable to unexpected events that are relevant only to the security.

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EMPIRICAL RESULTS
To test the multi-model by the equation (1), I collect the price data of Binh Minh Joint Stock Company Security (BMP) from Jul 2006 to Oct 2008 (table 1.1) in order to estimate the correlation of market factor (Vn-index), consumer price inflation factor (CPI) and exchange rate D:US$ factor (FX) to the security excess return. I also collect the data of Vn-index, CPI and exchange rate at the same period as the BMP security data. (table 1.1, 1.2, respectively).

The cumulative returns for BMP, Vn-index, CPI and exchange rate

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BMP CPI FX INDEX

BMP 1.000000 -0.308915 -0.380076 0.928555

CPI -0.308915 1.000000 0.146585 -0.344953

FX -0.380076 0.146585 1.000000 -0.328394

INDEX 0.928555 -0.344953 -0.328394 1.000000

The correlation matrix The correlation between BMP and Vn-index is 0.929, nearly +1, indicate perfect positive correlation. This means that the return of Vn-index and BMP are going together up (or down). The correlation between BMP and FX, BMP and CPI is -0.38 and -0.31 respectively, indicate negative correlation. This means that CPI and the return of BMP as well as CPI and the return of BMP vary inversely in this particular scenario analysis Dependent Variable: BMP Method: Least Squares Date: 11/17/08 Time: 13:28 Sample: 2006M07 2008M10 Included observations: 28 Variable C INDEX FX CPI R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient 0.005588 1.386824 -1.955830 0.043658 0.868773 0.852369 0.092638 0.205962 29.04144 52.96284 0.000000 Std. Error 0.020125 0.126343 1.806236 0.213281 t-Statistic 0.277678 10.97662 -1.082821 0.204699 Prob. 0.7836 0.0000 0.2896 0.8395 -0.00004 0.241101 -1.788674 -1.598359 -1.730493 2.706301

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

The regression results show as follows that the Adjusted R-squared is 0.8524 and it tells that 85.24% of the variation in BMPs excess return is explained by the variation in the Vn-index, consumer price inflation, exchange rate and 14.76% of the variation is the BMP firm specific, or unexplained by market movements. The standard error of the regression is 0.0926 and it means that the firm specific component of BMPs excess return is between 0.0926%. The regression intercept (alpha) is 0.0056. The positive alpha means that measured by realized returns, BMP stock was above the security market line for this period. The standard

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error is small 0.02. The t-statistic is 0.2777, indicate low statistical significance. The p-value is 0.7836, which indicates that the probability is 78.36%. The beta coefficient of Vn-index estimate is 1.387. The standard deviation of Vn-index is 0.126. The p-value of t-statistic is 0.0000, signifying that the excess return on the Vn-index has explanatory power for the variability of the returns of BMP. The t-statistic is 10.977, indicate high statistical significant, so I reject the null hypothesis H0: beta = 0 at 95% significant level. This means that the excess return of Vn-index has a strong effect on the return of BMP. The beta coefficient of FX estimate is -1.955. The standard deviation of FX is high 1.80. The t-statistic is -1.08, then there is no evidence that the null hypothesis is false. This means that the FX has no significant different on the return of BMP. The p-value of t-statistic is 0.2896, indicates that the probability is 28.96%. The beta coefficient of CPI estimate is 0.044. The standard deviation of CPI is 0.213. The tstatistic is 0.205, indicate low statistical significance. This means that the CPI has no significant different on the return of BMP. The p-value of t-statistic is quite large 0.8395, indicates that the probability is 83.95%.

CONCLUSIONS

According to the correlation and regression analysis, The return of VN-index has strong effect on the return of BMP stock and BMP excesss return moved together with the return of Vn-index. The exchange rate has no effect on the excess return of BMP and vary inversely with BMPs return, however, the standard error of the regression is so high so I cannot conclude this data is confident . The consumer price inflation has low effect on the return of BMP with low beta coefficient, low statistical significant and the p-value is quite large.

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REFERENCES
1. Bodie, Kane, Marcus (2007). Essentials of Investment 6th Edition. McGraw Hill Companies, Inc. Pages 127-219 2. William F. Sharpe (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, Vol 19, Issue 3 (Sep., 1964), pp. 425-442 3. Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of Financial Economics 9, pp. 3-18. 4. Eugene F. Fama and Kenneth R. French (1993). Common risk factors in the returns on stock and bonds. Journal of Financial Economics 33, pp.3-56 5. Eugene F. Fama and Kenneth R. French (1995). Size and book-to-market factors in earnings and returns. Journal of Finance 50, pp.131-155. 6. Eugene F. Fama and Kenneth R. French (1996). Multifactor explanations of asset pricing anomalies. Journal of Finance 51, pp.55-84. 7. Binh Minh Joint Stock Company Data is collected from Saigon Securities Inc and VNDirect Securities Corporation http://www.ssi.com.vn/Default.aspx?tabid=161&stockId=8 https://www7.vndirect.com.vn/vndirectonline/online/brokerage/research/Snapshot_123321_1226570786895df3f08a5d85e7651603 f53c83257aef0.do 8. VN-index Data is collected from Hochiminh Stock Exchange http://www.hsx.vn/hsx/Modules/Statistic/VnindexStatistic.aspx 9. CPI and Exchange rate data are collected from Viet Nam General Statistics Office and International Financial Statistics http://www.gso.gov.vn/ http://www.imfstatistics.org/imf/

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APPENDIX
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Company Name: Abbreviation:

Binh Minh Plastics Joint-stock Company BMPLASCO

Logo:

o o o o o o

Charter Capital: Headquarters: Phone: Email: Website:

139,334,000,000 VN 240 Hau Giang St, Ward 9, District 6, Ho Chi Minh City. (84-83) 969.0973 Fax: binhminhplas@hcm.fpt.vn www.binhminhplastic.com (84-83) 960.6814

Share Outstanding: 13,933,400

BINHMINH PLASTICS JOINT STOCK COMPANY (BMPLASCO), directly belongs to Ministry of Industry, is a state owned enterprise. Beginning with a small private business which was born in the early of the 1960s, BINHMINH PLASTICS JOINT STOCK COMPANY, passing through some kinds of ownership and developing stages, has been become a high top ranking of plastic manufacturer and taken prestige in Vietnam plastics industry. Binh Minh's products are manufactured in accordance with the standards ISO, BS, AS, TCVN,... on the most famous equipment such as KraussMaffei, Cincinnati, Corma,... Effectively apply the quality management system ISO 9001: 2000 with the talent and skilful employees, Binh Minh has taken customers' trust in domestic market and in abroad. Binh Minh had won both in land and international prizes, and got the "Gold Star Award" for the trade name. Binh Minh products have been sellected to" The Vietnam high quality products" consecutively from 1996 up to now. The Company has two factories: Factories #1: 240 Hau Giang St, Ward 9, Dist 6, HCMC. Tel: ( 84.8) 39690973 ( 84.8) 39694524 Fax: ( 84.8) 39606814
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E-mail : factory1@binhminhplastic.com.vn Factories #2:7 Road No. 2, Song Than 1 Industrial Park, Di An Dist, Binh Duong Province. Tel: ( 84.8) 38968465 Fax: (0650)790396. E-mail : factory2@binhminhplastic.com.vn With a defined strategy to become the leader of plastic pipes and fittings producer in Vietnam, the company's products have been taken a stable position with the big market share in Vietnam market, affirming the superiority on quality and being in harmony with national and the international standards. With the pattern of about 60.000m2 area and the most modern equipment from Germany, Italy, Australia, Canada, the well educated and the ardent persons which is becoming Binh Minh's advantages in competition on the market. Defining a firm development strategy, unceasingly improving the management system in accordance with ISO 9001:2000 standard, investing on persons, modernizing machinery and equipment and improving quality products are always the motto which goes along with the development of Binh Minh. BINHMINH PLASTICS JOINT STOCK COMPANY, with the defined strategies of above, has confidence in the stable development in the future. Ownership Structure: State: 31.09% Foreign Ownership: 48.92% Other: 19.99%

Major Holders:
Holder Citigroup Global Market LTD & Citigroup Global Market Financial Products LTD. State Capital Investment Corporation (SCIC) ng Vietnam Holding Ltd Shares 1,097,604 4,230,290 838,900 900,000 Ownership 6.51% 30.36% 7.83% 6.46%

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BMP Date 10/2008 09/2008 08/2008 07/2008 06/2008 05/2008 04/2008 03/2008 02/2008 01/2008 12/2007 11/2007 10/2007 09/2007 08/2007 07/2007 06/2007 05/2007 04/2007 03/2007 02/2007 01/2007 12/2006 11/2006 10/2006 09/2006 08/2006 07/2006

VN-Index

T-bills

Price Return Point Return Return 35,500 -0.27 347.05 -0.24 0.011 48,500 -0.20 456.70 -0.15 0.011 61,000 0.22 539.10 0.19 0.011 49,800 0.27 451.36 0.13 0.011 39,100 -0.30 399.40 -0.04 0.011 56,000 -0.22 414.10 -0.21 0.011 72,000 -0.04 522.36 0.01 0.011 75,000 -0.29 516.85 -0.22 0.011 105,000 -0.23 663.30 -0.21 0.006 137,000 -0.17 844.11 -0.09 0.006 165,000 -0.04 927.02 -0.05 0.006 172,000 -0.04 972.35 -0.09 0.006 179,000 -0.03 1,065.09 0.02 0.006 184,000 0.05 1,046.86 0.15 0.006 175,000 0.06 908.37 0.00 0.006 165,000 -0.15 907.95 -0.11 0.006 195,000 -0.08 1,024.68 -0.06 0.006 211,000 0.26 1,084.48 0.17 0.006 167,000 -0.24 923.89 -0.14 0.006 220,000 -0.08 1,071.33 -0.06 0.006 238,000 -0.05 1,137.69 0.09 0.006 251,000 0.72 1,041.33 0.39 0.006 146,000 0.32 751.77 0.19 0.006 111,000 0.37 633.05 0.24 0.006 81,000 0.03 511.54 -0.03 0.006 79,000 0.05 526.73 0.07 0.006 75,500 0.29 491.18 0.16 0.006 58,500 0.00 422.41 0.00 0.006 Table 1.1

VN-Index MR premium -0.25 -0.16 0.18 0.12 -0.05 -0.22 0.00 -0.23 -0.22 -0.10 -0.05 -0.09 0.01 0.15 -0.01 -0.12 -0.06 0.17 -0.14 -0.06 0.09 0.38 0.18 0.23 -0.04 0.07 0.16 -0.01

BMP R premium -0.28 -0.22 0.21 0.26 -0.31 -0.23 -0.05 -0.30 -0.24 -0.18 -0.05 -0.05 -0.03 0.05 0.05 -0.16 -0.08 0.26 -0.25 -0.08 -0.06 0.71 0.31 0.36 0.02 0.04 0.28 -0.01

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Inflation Rate Date 10/2008 09/2008 08/2008 07/2008 06/2008 05/2008 04/2008 03/2008 02/2008 01/2008 12/2007 11/2007 10/2007 09/2007 08/2007 07/2007 06/2007 05/2007 04/2007 03/2007 02/2007 01/2007 12/2006 11/2006 10/2006 09/2006 08/2006 07/2006 23.15 27.90 28.30 29.10 28.80 27.20 23.30 21.40 17.50 15.90 14.40 11.80 11.00 10.50 10.30 8.40 7.80 7.20 7.10 6.70 6.50 6.50 6.60 6.80 6.70 6.80 7.30 7.40

FX rate VND/USD 16,805 16,570 16,500 16,842 16,842 16,246 16,175 16,125 15,750 16,005 16,030 16,070 16,100 16,105 16,270 16,147 16,125 16,087 16,047 16,024 15,990 16,036 16,054 16,089 16,083 16,055 16,014 16,007 Table 1.2

Inflation Rate -0.1703 -0.0141 -0.0275 0.0104 0.0588 0.1674 0.0888 0.2229 0.1006 0.1042 0.2203 0.0727 0.0476 0.0194 0.2262 0.0769 0.0833 0.0141 0.0597 0.0308 0.0000 -0.0152 -0.0294 0.0149 -0.0147 -0.0685 -0.0135 0.0000

FX rate VND/USD 0.0142 0.0042 -0.0203 0.0000 0.0367 0.0044 0.0031 0.0238 -0.0159 -0.0016 -0.0025 -0.0019 -0.0003 -0.0101 0.0076 0.0014 0.0024 0.0025 0.0014 0.0021 -0.0029 -0.0011 -0.0022 0.0004 0.0017 0.0026 0.0004 0.0007

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Residual Graph

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The cumulative returns for BMP and CPI

The Scatter Chart of BMP and CPI

The cumulative returns for BMP and Vn-index

The Scatter Chart of BMP and Vn-index

The cumulative returns for BMP and Exchange rate

The Scatter Chart of BMP and Exchange rate

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