Asset Pricing Model And Efficiency Porfolio Investment On Difference
Foreign Ownership: Evidence From Vietnam Stock Market
Anh Phong Nguyen
Hoang Anh Nguyen
Thi Hong Minh Ho
Phu Thanh Ngo
University of Economics and Law, Vietnam National University - HCMC, Vietnam
Abstract
This study aims at assessing the risk – return profile of stock portfolios by different levels of the foreign
ownership ratio. The article also evaluates the performance of portfolios by their size and the book-to-market
ratio (BTM). In this study, we apply GMM approach with the data computed from stock related data based in
Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange for the period 2010-2017. Our findings reveal a
pronounced foreign ownership impact, whereby the increase in the foreign ownership ratio results in the
upturn in stocks’ liquidity, return and size but also brings about the higher risk for stocks. Besides, our
empirical analyses indicate that the portfolios with the foreign ownership ratio falling either to the bottom
20% or to the top 20% outperform other portfolios. In addition, the study suggests that investors could consider
the large-size portfolio with the medium level of BTM as well as the small-size portfolio with the high level of
BTM.
Keywords: Foreign ownership, pricing model, risk and return of stock portfolio
JEL Classification : C58, E22, G12, G38
1. Introduction
A considerable amount of literature has been published on asset pricing models since the 1970s. Until now,
there remains three research approaches on this topic: The first approach, which are typically represented by
Fama-French’s studies (1992, 1993), claims that the risk of assets arises by anomalies beyond the market risk
factor because their returns may fluctuate in the same way but different from the market. The second one,
which is supported by Daniel-Titman (1997), suggests that there are other risk factors simply because of the
companies’ characteristics. The third one, which is consider the return into different portfolios based on
portfolios of independent variables, such as ownership variation or investment variation; this one is
demonstrated in studies of Söhnke M. Bartram, John Griffin, and David Ng (2004, 2015).
However, few investigations have applied the pricing model to assess the fluctuations in return and risk of
stock portfolios with respect to the difference in foreign ownership ratio among many stock markets around

the world. For instance, Söhnke M. Bartram, John Griffin, and David Ng (2004, 2015) examined the fluctuations
in return and risk of portfolios with different foreign ownership structure from developed and emerging stock
markets. The studies ofNildagBasakCeylan, BurakDogan& M. HakanBerument (2015) on Borsa Istanbul stock
market or Roger D. Huang and Cheng-Yi Shiu (2009) on Taiwan stock market generated similar issues.
Moreover, the study on the risk – return profile of stock portfolios by different levels of the foreign ownership

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ratio has not been applied in Vietnam stock market, which is considered to get promoted from a frontier
market to an emerging market.
Vietnam stock market was officially launched in 2000. After 17 years of establishment and development;
nevertheless, in comparison with other countries, Vietnam stock market is still an emerging market with small
size and limited liquidity. Especially, the market depends highly on institutional investors and foreign
investors. For a long time, Viet Nam imposed restrictions on foreign ownership in domestically listed firms:
up to 49% of the equity for the listed companies and up to 30% for the listed banks. However, the Decree.
60/2015/NĐ-CP which was promulgated by the government on 26 June 2015 and effective from 1 September
2015, has allowed firms except for certain cases to be hold by foreign investors up to 100%, unless otherwise
stipulated by the firm’s rules and regulations. Scrapping the cap of foreign ownership could have a positive
impact on increasing liquidity in the market, attractting new investment capital to expand the business
scales… However, it also may create risk for the market, i.e. if the market has shocks, foreign investors may
withdraw their capital, causing huge risk to investors as well as destablizing the macro economy.
We conduct this research to examine whether the change in foreign ownership restriction has positive or
negative impact on the price volatility or the rate of return and risk bearing by investors if they invest in
portfolios with different foreign ownership ratios after 2 years of amendment on foreign ownership ratios as
set out in Decree No. 60. Based on the analyses, it is possible to look back at this regulation to address its
reasonable and unreasonable issues to adjust in time in order to meet the needs of financial integration and
stability. This is an urgent prerequisite since Vietnam stock market is on its way to increase liquidity for a
market reclassification from the frontier to the emerging market.
The remainder of the paper is organized as follows: Section 2 outlines theories and typically related studies;

Section 3 discusses the research methodology; Empirical results are presented in Section 4 and Section 5
concludes the paper.
2. Literature review
Prior to Fama-French’s three factor pricing model, some studies have shown that CAPM does not work
well in practice. These are studies by Banz (1981) or Basu (1983). Banz (1981) is the first evidence-based study
on the relationship between return and market price of listed stocks on NYSE, showing that stocks with lower
market capitalization (small stocks) tend to have higher average returns than large stocks. This research also
conceded that CAPM is not suitable. Basu (1983), on the other hand, examined the relationship between several
factors and returns on the common stock of NYSE firms, including the earnings price ratios (E/P) and firm
size (as measured by the market value of common stock). The results also reported that the common stock of
small NYSE firms appeared to have higher returns than the common stock of large NYSE firms, meanwhile,
stocks with high E/P had higher returns than stocks with low E/P. Fama and French (1992) assessed the
impact of market beta, size (measured by the market value of common stock), book to market equity ratio
(BE/ME), two leverage variables as the ratio of book assets to market equity (A/ME) and the ratio of book
assets to book equity (A/BE), and the earnings price ratio (E/P) on stock return. The authors acknowledged
that even if the market beta is used on it own, discarding the other variables, the relationship between beta
and return is significantly weak. Meanwhile, the size and BE/ME have a close relation with return, even when
combined with other variables. Fama and French (1993) identified 5 common risk factors affecting returns on
stocks and bonds; in which there are 3 stock-market factors, including an overall market factor and factors
related to firm size and book-to-market equity (BE/ME). Fama and French (1995) observed whether there was
a relationship between the behavior of stock prices and the size or the BE/ME ratio since traditional theories
suggest that stocks with higher BE/ME ratio typically have lower return whereas stocks with lower BE/ME
ratio have higher return. This research is developed by their previous one (1993), yet extended by using the

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dividend to price ratio (D/P). The result suggested that the market factor, size and BE/ME ratio play a role in
explaining stock returns. Specifically, the size and BE/ME ratio helped to clarify the behavior of stock prices
whereas other factors such as D/P ratio is not significant.

By the same token, Pin Huang Chou, Robin K.Chou, and Jane Sue Wang (2004) questioned whether the
size and BE/ME ratio have a significant effect on stock return and the result emphasized that predictability of
the size and BE/ME generally decreases over time periods 1982-2001 and 1990-2001 respectively. Yet, the
result pointed out that the size still has meaningful value in January. The relationship between the stock return
and the size is negative. In the recent work, Fama and French (2008) tested the anomalies in the asset pricing
model by using research data from listed stocks on NYSE, AMEX and NASDAQ for the period 1963-2005. This
research took into account the abnomalies such as profitability, asset growth rate,... and explore the differences
across micro, small and large groups. The result indicated that there are asset growth anomalies only in small
group in comparison with large group. Companies with higher profitability and earnings tend to have higher
abnormal return, yet there is still no evidence that companies with low earnings would have lower abnormal
return. Similarly, Tran and Nguyen (2012) examined the impact of the size on the return of listed stocks in
Vietnam stock market, and discussed about ‘the risk of the size’. With the data collected for the period from
1/2007 to 12/2011, the authors figured out that the size is associated with the stocks’ return with the slope of
greater than zero. This findings challenge the work of earlier researchers and it is probably a characteristic of
Vietnam stock market.
From another perspective, Weimin Liu (2006) studied the liquidity in the asset pricing model, in which
liquidity proxy is the number of traded shares to the number of outstanding shares ratio, adjusted to
nontrading days. This work tested the asset pricing model by combining liquidity with three factor FF model
(1993). The findings showed that the two factor model – comprising market and liquidity - explains quite well
the fluctuations in return; whereas BE/ME variable in the Fama French three factor model is not significant in
the pricing model. In like manner, Lam, K and Tam Lewis (2011) investigated the rationality in asset pricing
models in Hong Kong stock market for the period 1981-2004. The result proved that the Fama and French
three factor model combined with liquidity (measured by the ratio of the number of traded shares to the
number of outstanding shares) can be used to explained the return of listed stocks, meanwhile the Carhart
four factor model (1997) could not. Likewise, Nguyen Anh Phong (2016) developed the Fama French three
factor model by adding liquidity, in which liquidity is measured by two different ways. The author argued
that when the liquidity was added, the risk-return measurement model becomes more effective than CAPM
or the Fama French three factor model. The Fama French five factor model is an extension of the Fama French
three factor model with three anomalies are added, consist of issued stocks, advances, volatility,
momentum.The Fama French five factor model performs better than the Fama French three factor model when

applied for the left hand side portfolios (LHS) except for investment portfolios established from size and
advances.
Roger D. Huang and Cheng-Yi Shiu (2009) applied Carhart model to evaluate the investment performance
of foreign investors in Taiwan stock market. This study is different from previous work in respect of examining
factors which were assumed to affect the portfolio’s risk-return based on their foreign ownership ranking.
Stocks are divided into five portfolios ranked by foreign ownership from high to low. The finding indicated
that the return and risk of portfolios with high level of foreign ownership is higher than that of portfolios with
low level of foreign ownership. Recently, Söhnke M. Bartram, John Griffin, and David Ng (2004, 2015) found
evidence on the ‘foreign ownership effect’ promoted by active reallocations of global institutions as opposed
to fund flows from end investors and the importance of foreign ownership linkages for international stock
returns – that implied implications for international portfolio diversification.

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3. Methodology
3.1. Research data
Data for this study were collected from Finpro and Thomson Reuters, including data of listed firms over
the 2010 – 2017 period except for those in banking, securities, insurance and hedge funds sectors since they
have their own financial reporting systems and regulations on foreign ownership as well. Table 1 shows that
the ratio of number of selected companies to number of total listed companies is very high, ensuring the
reliability of the research. Moreover, firms with book value of less than zero are also excluded.
Table 1. Number of listed companies and number of selected companies
Year

Number of listed
companies

Number of selected
companies


Percentage %

2017

728

683

93.82

2016

692

639

92.34

2015

674

612

90.80

2014

645


567

87.91

2013

639

549

85.92

2012

654

536

81.96

2011

643

515

80.09

2010


596

471

79.03

Source: State Securities Commission of Vietnam

3.2. Research model
The study aims at assessing the investment efficiency of investors in terms of risk and return, based on
differences in foreign ownership ratio as mentioned in Roger D. Huang and Cheng-Yi Shiu (2009). In addition,
in developing and emerging markets like Vietnam stock market, liquidity plays an important role in
explaining the risk- return profile of stock portfolios (Nguyen Anh Phong, 2014); therefore, in this study, we
propose a research model to evaluate the investment performance in terms of risk and return as follows:
Rit – Rft = ai + bi(RMt – Rft) + si(RSMBt) + hi(RHMLt) + li(RLMHt) + eit
Where:
Rit :average returns of stock portfolios i, in which portfolios are classified into 5 categories by foreign
ownership ratio of listed companies, including R1, R2, R3, R4 and R5 portfolios. R1 is the return of portfolio
with 1/5 (or 20%) stocks having largest foreign ownership likewise R5 is the return of portfolio with 1/5 (or
20%) stocks having smallest foreign ownership. Besides, we also consider average returns of other categories,
including: average returns on stock portfolio with large size and high book to market ratio (BH), average
returns on stock portfolio with large size and medium book to market ratio (BM), average returns on stock
portfolio with large size and low book to market ratio (BL), average returns on stock portfolio with small size
and high book to market ratio (SH), average returns on stock portfolio with small size and medium book to
market ratio (SM), average returns on stock portfolio with small size and low book to market ratio (SL)
RMt: average market return
RFt: risk free rate (interest rate on 1 year T-bill obtained from quoted price at the first day of each month,
calculated on monthly basis)
RSMBt :the difference between average return on small portfolio and average return on large portfolio

RHMLt: the difference between average return on high BE/ME portfolio and average return on low BE/ME
portfolio

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RLMHt: the difference between average return on low liquidity portfolio and average return on high liquidity
portfolio. Liquidity is measured in two ways:
+ Liq1 is measured by the average trading value of shares each month (in million dong)
+ Liq2 is measured by the number of traded shares each month to the number of outstanding shares ratio
ai :the regression coefficient
bi, si, hi, li :the slope coefficients of portfolios respectively
eit: the error term
In estimated models using GMM method, we use I/V variable (instrumental variable) as the return of the
previous time (Rt-1). Theoretically, using Rt-1is consistent with Fama’s statement on rational expectation and
efficient market hypothesis; because if the market is efficient, all information is reflected in price, then the
return of the previous time is expected for the current time. In addition, Hansen, Singleon (1982) and Cochrane
(2000) adjusted the omega matrix to correct all common errors when using time series data, most commonly
using Rt-1as the endogenous variable or I/V variable and still provide consistent and efficient estimations. In
this study, beside using the lagged (t-1) variables of R1 to R5 as I/V variables, we also use liquidity variable 2
(Rliq2) as I/V variable as liquidity 2 is measured by the number of traded shares each month to the number
of outstanding shares ratio whereas liquidity 1 is measured by the average trading value of shares each month.
Therefore, it is clearly that outstanding shares have an effect on trading value of shares.
4. Research result
Table 2. Descriptive statistics
Variable
RBH
RBM
RBL
RSH

RSM
RSL
RSMB
RHML
R1
R2
R3
R4
R5
RLIQ1

Obs
96
96
96
96
96
96
96
96
96
96
96
96
96
96

Mean
0.87
1.97

2.46
-1.51
0.74
2.32
-1.25
-2.72
1.41
1.31
1.22
1.29
1.61
-3.44

Std. Dev.
2.68
3.66
2.84
6.96
8.42
5.93
4.97
2.38
5.39
5.60
5.75
6.62
5.95
9.35

Min

-6.07
-7.92
-3.94
-16.78
-22.60
-15.03
-13.09
-10.72
-11.53
-14.28
-14.49
-15.44
-14.89
-34.25

Max
8.33
14.30
13.45
18.92
24.46
17.41
15.15
3.52
14.66
21.22
16.88
19.60
19.76
15.41


Source: Calculated based on data from Finpro and Thomson Reuters

Table 2 shows that portfolios with higher foreign ownership ratio tend to have higher average return:
return on portfolio with the highest level of foreign ownership is 1.61% per month whereas return on portfolio
with the lowest level of foreign ownership is 1.41% per month. In terms of liquidity, the high liquidity portfolio
has higher average return (5.14%) in contrast to the low liquidity portfolio with average return of 1.71%. In
terms of size, the average return of large-size portfolio is higher than the average return of small-size portfolio.
In terms of value, the average return of portfolio with low BE/ME is higher than the average return of high
BE/ME. Table 1 also states the big variation in variables, data seem to be non-stationary

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Table 3. Stationarity Testing
Variables

Test Statistic

1% Critical Value

P-Value

RMRF

-6.25

-3.52

0.00


RBH

-8.1

-3.52

0.00

RBM

-8.49

-3.52

0.00

RBL

-9.01

-3.52

0.00

RSH

-7.41

-3.52


0.00

RSM

-6.77

-3.52

0.00

RSL

-6.53

-3.52

0.00

RSMB

-6.81

-3.52

0.00

RHML

-8.46


-3.52

0.00

R1

-7.49

-3.52

0.00

R2

-7.54

-3.52

0.00

R3

-7.23

-3.52

0.00

R4


-7.17

-3.52

0.00

R5

-7.2

-3.52

0.00

RLIQ1

-9.14

-3.52

0.00

RLIQ2

-8.26

-3.52

0.00


Source: Calculated based on data from Finpro and Thomson Reuters

Results from ADF (Augmented Dickey Fuller) test report that the computed absolute t-statistic values are
all larger than the absolute critical value of 3.52 with a significant level of 1%; indicating that all variables are
stationary. This finding suggests that using the GMM method is reasonable, according to Jagannathan and
Skoulakis (2002).
Table 4. Result regressions using GMM method
Dependent variables

Alpha

RM-RF1

RSMB

RHML

RLIQ1

R2

RMSE

R1

4.00(*)

5.17(*)


0.33(*)

-0.17

-0.34(*)

0.76

2.61

R2

1.41

2.07(***)

0.63(*)

-0.44(*)

-0.28(*)

0.81

2.40

R3

-0.06


0.35

0.82(*)

-0.64(*)

-0.24(*)

0.84

2.25

R4

1.78

2.35

0.93(*)

-0.55(*)

-0.25(*)

0.84

2.64

R5


3.18(**)

3.79(**)

0.86(*)

-0.59(*)

-0.16(*)

0.73

3.08

RBH

1.26

1.68

0.09

-0.14

-0.18(*)

0.57

1.74


RBM

2.40(**)

3.47(**)

0.14(***)

-0.53(*)

-0.24(*)

0.57

2.38

RBL

1.04

1.29

0.02

-0.58(*)

-0.23(*)

0.69


1.56

RSH

1.5(***)

1.88(***)

0.91(*)

0.49(*)

-0.21(*)

0.94

1.71

RSM

2.00

2.95(**)

1.35(*)

-0.64(*)

-0.26(*)


0.91

2.49

RSL

1.50

2.07(***)

0.99(*)

-1.09(*)

-0.18(*)

0.91

1.81

Source: Calculated based on data from Finpro and Thomson Reuters; (*), (**), (***) indicates the level of significance at the
1%, 5% and 10% respectively; endogenous variables include first lag variables of R1, R2, R3, R4, R5 and Liq2 variables

1Note:

RF is calculated as 10 year government bond yield on a monthly basis and interest rate is presented per month; MEt = PtxSt,in which:
MEtis size at time t (in million dong), Pt is price at time t and St is outstanding shares at time t (calculated each month); the book to market
equity ratio variable (BE/ME) is calculated by the following formula: (BE/ME)t = BEt-1/MEt, in which: BEt-1 is the book value of equity.
Because this value is known only at the end of the fiscal year, the book value of equity for the preceding year (year t-1) is used for this
year; returns on BH, BM, BL, SH, SM, SL, SMB, HML portfolios are addressed based on studies of Fama-French (1992-1993-2012), Carhart

(1997), Weimin Lin (2006), Lam K và Tam Lewis(2011), and many others; R1, R2, R3, R4, R5 portfolios are average returns of portfolios
sorted by different foreign ownership ratios from the 20% lowest to the 20% highest

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Table 4 reports the following remarkable findings:
According to alpha values, models all have positive values except for R3 portfolio with alpha = -0.06 < 0.
Nevertheless, only four models R1, R5, RBM and RSH have alpha > 0 and are statistically significant. It is
worth noting that among two groups with low level of foreign ownership (R1) and high level of foreign
ownership (R5), the alpha values are 4% and 3.18% respectively. This shows the highest average return (when
other things held constant)
Regarding to market risk premium, high level of foreign ownership tends to reduce the price manipulation
and herd-like investment of local investors when they chase after foreign investment. The regression shows
that at the low level of foreign ownership, the market beta is 5.17 while at the high level of foreign ownership,
the market beta is 3.79 and all are statistically significant. Portfolios with small size also have low beta, proving
that they face less risk.
In terms of firm size, portfolios with high level of foreign ownership have beta coefficients of 0.93 and 0.86,
which are higher than portfolios with low level of foreign ownership with beta coefficients of 0.33 and 0.63.
The finding implies that firms with high level of foreign ownership endure more risk.
Considering the firm value, the results point out that all beta coefficients < 0, indicating that the returns on
portfolios and the return on HML portfolio are negative correlated. The results also state that portfolios with
high level of foreign ownership or small size have high beta, meaning that they face more risk than ones with
low level of foreign ownership or large size
Finally, in terms of liquidity, the results show that all beta coefficients < 0, suggesting that the returns on
portfolios and the return on Liq1 portfolio are negative correlated. The estimation also finds that portfolio with
high level of foreign ownership has less risk than portfolio with low level of foreign ownership. Because when
foreign ownership ratio is low, raising foreign ownership leads to increase in efficiency expectation and thus
increase return as well; besides, increase in liquidity results in higher risk as such variables are inverted
5. Summary and conclusion

The increase in foreign ownership has contributed to increasing in size and liquidity for listed firms. The
following conclusions are drawn from this study:
If investors are interested in a superior investment strategy on the alpha value, they should pay attention
to portfolios with the lowest or highest level of foreign ownership. In addition, the portfolio with large size
and medium book to market equity ratio and portfolio with small size and high book to market equity ratio
also need to be taken into consideration.
The above suggestion is also applied for investors tracking to the markets; meaning that investors should
take into account portfolios with the lowest or highest level of foreign ownership. Besides, the portfolio with
large size and medium book to market equity ratio and portfolio with small size should be concerned
Risks in terms of size and value of portfolios rise in correspondence with increase in foreign ownership
ratio, so it is necessary for investors who want to have high return and low risk to construct balanced
investment portfolios by considering portfolios with high beta coefficient in size and portfolios with beta
coefficient in value and liquidity
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