Response asymmetries in the Latin American equity markets

Abstract

Recent empirical work has found causal relationships with varying degrees of strength from the equity market of Mexico to the markets of Argentina, Brazil, and Chile. In this study, we analyze the possibility of response asymmetries in these causal relationships. In particular, using the 1995–1999 daily data on equity price indices from the International Finance Corporation's (IFC) Emerging Markets Database, we analyze market interconnectedness by explicitly taking into account country-specific response anomalies. We find statistically significant asymmetries in the responses of Argentina, Brazil, and Chile to changes in the Mexican equity market — with responses to downturns much outweighing upturns in the equity market of Mexico. The results are consistent with the view that when investing in emerging equity markets in Latin America, investors react to negative stock market movements originating in the Mexican market more heavily than to positive movements.