Abstract
This article examines the existence of lead-lag effects between the U.S. stock market (NYSE) and the Brazilian stock market (Bovespa), i.e., whether upward and downward price movements in the NYSE are followed, on average, by similar movements in Bovespa, which would enable predicting stock prices in the Brazilian market, thus providing arbitrage opportunities. The existence of this effect would indicate a relative segmentation between these two markets, which would violate the efficient market hypothesis, whereby stock prices are unpredictable. Cointegration between the two markets was identified as well as the existence of bi-directional causality (Granger test). The results obtained from VECM, TSLS and GARCH regressions showed that the two markets are segmented and that returns of the Bovespa Index (Ibovespa) are to a large extent explained by the stock price movements in the Dow Jones Index some minutes beforehand. However, the results also show that the practice of arbitrage based on the lead-lag effects is not economically feasible due to transaction costs.
Highlights
Oliveira and MedeirosThe advances in communications and information technology, dating from the middle of the twentieth century, have contributed decisively toward the integration of global stock markets
According to the efficient market hypothesis (EMH), stock prices are not predictable, because they behave like a random walk, not permitting arbitrage
In this work we investigate the existence of lead-lag effects between the American and Brazilian stock markets by determining the lags between price movements in the New York Stock Exchange (NYSE) and Bovespa
Summary
Oliveira and MedeirosThe advances in communications and information technology, dating from the middle of the twentieth century, have contributed decisively toward the integration of global stock markets. Such a situation runs counter to the EMH and makes it possible to predict, with a certain level of confidence, the price movements in the lagging markets in function of those in the leading market This situation, if sufficiently pronounced, would provide opportunities for abnormal gains in the lagging markets through arbitrage. We analyze the effects of variations in the DJIA on specific shares in the Brazilian market, the twelve stocks with greatest weight in the Ibovespa, in light of their higher trading volume. These stocks represent over 50% of the index’s weight.
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