Market Reaction to the Announcements of Free Trade Agreements: Evidence from Vietnam

Abstract

This study examines the reaction of the Vietnamese stock market to Free Trade Agreement (FTA) announcements. We find that FTA announcements exert a negative impact on stock return, which persists for at least 30 days after the announcement date. We also document that FTA initiation and signing announcements adversely affect stock return, whilst the announcements of an FTA taking effect tend to reverse this negative impact. In addition, we find that bilateral FTAs exert a more negative impact on the stock market compared to multilateral FTAs, and industries having no comparative advantage are more severely affected. Our results, therefore, suggest that FTA is not always considered by market participants to be a win-win solution for all parties in international trade, as developing countries tend to be disadvantaged. This provides important insights for policymakers, especially those from low-skilled countries, to carefully consider the signing of an FTA and to support disadvantaged industries. It is also useful for investors in making investment decisions surrounding FTA announcements.

Keywords:

• Free trade agreements
• stock market reaction
• abnormal return
• developing economy
• international trade

Notes

1 This is the key congress of the Communist Party of Vietnam, organized by the Central Committee regularly every five years. The congress was held to summarize the achievements and limitations of the previous periods, and determine the direction, goals, tasks, and solutions in terms of economy, society, security, and politics in the upcoming periods.

2 VN index is a value weighted index of all stocks listed on the Ho Chi Minh City Stock Exchange Center (HOSE) - the first centralized securities trading organization in Vietnam. This index is considered the official market index of Vietnam.