Dynamic relationship between interest rate, exchange rate and stock price returns: The case of Vietnam

This study investigates the dynamic interactions between monetary policy interest rates, exchange rates and stock returns in Vietnam using daily data over the period 2014–2024. Focusing on the VN-Index, the exchange rate between the United States Dollar (USD) and the Vietnamese Dong (VND) and two key monetary policy instruments — the interbank overnight rate and the State Bank of Vietnam refinancing rate — the paper estimates a Vector Autoregression (VAR) that incorporates endogenously identified structural breaks corresponding to major policy regime shifts. Johansen tests reject the presence of any cointegrating relationship among the nonstationary series, which justifies estimation in first differences rather than a vector error correction specification. Impulse response functions with bootstrap confidence bands show that the response of stock returns to monetary policy shocks is statistically indistinguishable from zero at daily horizons, and that monetary policy instruments jointly account for less than 0.35% of the forecast error variance of stock returns. This null is informative for the interbank overnight rate, which moves almost daily; for the refinancing rate, which changed on only 10 dates in 11 years, it reflects the scarcity of policy events as much as the absence of an effect. By contrast, a strong bidirectional relationship links the stock and foreign exchange markets: a positive stock market shock produces a significant appreciation of the domestic currency within one trading day, consistent with the portfolio balance channel, while exchange rate shocks significantly depress stock returns. A battery of robustness checks — alternative identification orderings, generalized impulse responses, alternative lag lengths, subsample estimation and alternative treatments of the policy rate — confirms these results, but also shows that the stock-currency feedback is concentrated in the high-stress COVID-19 period rather than being stable over time. The findings suggest that in Vietnam, the endogenous dynamics between equity and currency markets matter more for short-run financial stability than the direct transmission of policy rates.