Using the GARCH model to measure the dual impact of money supply (M2) on returns and volatility risk in the Vietnamese stock market

The paper examines the dual impact of monetary policy, specifically money supply (M2), on the returns and volatility risk in the Vietnamese stock market over the period 2010-2025. The EGARCH-X model with Student-t distribution is employed to manage volatility clustering and the fat-tailed distribution of financial time series. The empirical results represent two critical findings. First, the expansion of money supply has a positive and significant impact on the VN-Index, highlighting the leading role of cash flow in asset valuation; this finding is consistent with the Portfolio Balance Theory. Secondly, the paper shows evidence that money supply (M2) is associated with a reduction in market volatility risk within the sample period, contradicting the view that liquidity expansion tends to cause short-term instability. Furthermore, the results indicate that the leverage effect is not statistically significant, suggesting that the market reacts relatively symmetrically to positive and negative information during this period. These findings provide important policy implications for the State Bank of Vietnam in managing monetary policy, contributing to maintaining the stability of the financial market.