Long-Run Relationship Among Latin America Stock Markets and the US - Impacts of the 2007/2008 Crisis

Abstract

The 2007-2008 sub-prime crisis has raised once more the interest on international market integration. Events of global importance tend to have a significant impact on the world’s stock markets. Empirical studies show that the co-movement patterns of national stock markets change significantly after major economic events like crises. A number of theoretical and empirical studies have employed a wide variety of methods and data frequencies to model the co-movement of international stock markets and searched for the reasons behind this phenomenon. Baillie and Bollerslev (1989) argue that the modeling of returns results in the loss of important information on possible common trends when prices are co-integrated. The aim of this paper is to investigate the potential time-varying behavior of long-run stock market relationships among Latin American countries and the United States employing the Engle-Granger methodology. In order to do that, we will investigate four Latin America emerging capital markets (Brazil, Argentina, Chile and Mexico) and the United States, considering the period of the recent financial crisis of 2007/2008, testing for co-integration before, during and after the crisis period. Our results show that Latin American equity markets seem to respond differently to shocks in the US stock markets in the long-run. The relationships between two Latin American countries - Argentina and Brazil - and the United States have changed over time, becoming more integrated. Chile’s and Mexico’s relationships with the US did not suffer a significant change during or after the crisis period. These findings show that Latin America does not respond homogenously to US shocks. This information provides evidence that, for international diversification, each country should be analyzed individually. Analyzing Latin America as a group could lead to mistaken conclusions about international diversification opportunities.