Regime linkages between the Mexican currency market and emerging equity markets

Abstract

This paper explores the issue of volatility regime linkages between the Mexican currency market and six emerging equity markets, namely, the markets of Mexico, Brasil, Argentina, Hong Kong, Hungary, and Thailand. We find evidence of regime dependence between the Mexican currency market and each one of these equity markets. On the basis of regime-dependent correlation coefficients, our results are interpreted as evidence of interdependence rather than contagion. For the equity markets of Brasil, Argentina, and Hong Kong, the dependence may be attributed to regime causality from the Mexican currency market. There is no evidence that the domestic currency market in Brasil, Argentina, and Hong Kong exercises a regime causal effect on the corresponding equity market, thereby suggesting that the causal effect to these equity markets does arise from the Mexican currency market and not from the domestic currency market.