Dependence between Chinese stock market and Vietnamese stock market during the Covid-19 pandemic

The Covid-19 pandemic has not only affected public health globally but has also significantly impacted financial markets, including those in Asia. A recent academic study explored the relationship between the Chinese stock market and the Vietnamese stock market during this unprecedented period. Understanding the dependence between these markets has critical implications for investors and policymakers alike.

The focus of the study was on the Ho Chi Minh City Stock Exchange (VNI) and the Shanghai Stock Exchange (SSEC), which respectively represent Vietnam and China’s prominent stock markets. Researchers aimed to investigate tail dependence—that is, the likelihood that extreme movements in one market correspond to extreme movements in another. This is crucial, as understanding tail risk can help in making informed investment decisions and mitigate potential losses.

### Pre-Pandemic Period: Limited Relationship

Before the pandemic, the study found that there was no significant dependence between the two markets. This was an important finding for investors looking for diversification opportunities. Since the two markets seemed to operate independently, investors could allocate their resources to either market without fearing significant spillover effects from one to the other. This independence allowed for a more balanced and diversified portfolio, which is a critical strategy in risk management.

### The Height of the Pandemic: A Shift in Dynamics

However, as the pandemic progressed, the situation changed dramatically. The study revealed that during the worst chaos of the Covid-19 pandemic, the Vietnamese stock market became increasingly dependent on the Chinese stock market. This was particularly pronounced in the upper tail of the distribution—meaning that when the Chinese market experienced significant gains or losses, the Vietnamese market followed suit closely.

This newfound dependence can be attributed to several factors. China, being one of Vietnam’s largest trading partners, directly impacts Vietnam’s economy. As economic activities were disrupted globally, any recovery or downturn in the Chinese market had ripple effects in Vietnam. Moreover, investor sentiment was likely influenced by the performance of the Chinese market, as international investors closely monitor market trends in China due to its stature in the global economy.

### Adapting to the Pandemic: A Gradual Shift

During the subsequent phase, as countries began adapting to the pandemic conditions, the study indicated that while the dependence persisted, it had diminished compared to the earlier chaotic period. This finding suggests that markets were entering a phase of adjustment, with investors becoming more accustomed to the new realities and opportunities arising from those changes. However, the relationship between the two markets reinforced the notion that local markets could be sensitive to external shocks, especially from larger economies.

### Implications for Investors

These findings are not just academic; they carry significant implications for investors and market analysts. Understanding the tail dependence offers valuable insights into risk management. During the pandemic, investors should have considered the heightened risks associated with investing in the Vietnamese market due to its reliance on the Chinese market.

For portfolio managers, employing assets from both markets would require a more nuanced strategy underlining risk management practices that factor in sudden changes in dependence. This could involve adjusting the allocation to each market or employing hedging techniques to mitigate potential losses.

### Copula Method in Analysis

A critical aspect of the study is its methodological approach using copulas. By employing multiple types of copulas—including Normal, Clayton, Plackett, Frank, Student, and Symmetrised Joe-Clayton—the researchers were able to analyze the complex relationships between the two markets accurately. This approach is beneficial in capturing the non-linear dependencies often present in financial data, especially during periods of market turmoil.

### A Call for Further Research

Given the findings of this study, there is a need for further research to understand the dynamics of stock market dependencies better. As we navigate uncertain times ahead, assessments of market relationships can be enhanced through continuous observation and data collection. The effects of geopolitical tensions, trade agreements, and continued public health challenges will further shape stock market behaviors and dependencies.

### Conclusion

The relationship between the Chinese and Vietnamese stock markets during the Covid-19 pandemic highlights the interconnectedness of global markets and the peculiarities of regional economies. As financial ecosystems evolve, understanding the dependence structure becomes essential for stakeholders aiming to navigate the complexities of investing in uncertain environments. Investors, analysts, and policymakers can benefit from these insights, fostering better preparedness for emerging market dynamics.

By harnessing the lessons learned from the pandemic, stakeholders can build more resilient strategies that not only capitalize on opportunities but also shield against potential risks. As the world continues to recover from the pandemic, watching these interdependencies will be crucial in shaping future investment decisions.

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