Abstract
This study employs a four-variable vector autoregressive (VAR) model to investigate the relationship of stock returns, inflation, interest rates and real economic activity. The sample consists of four Latin American countries from January of 1995 to December of 2005. Our results indicate heterogeneous patterns for the relationship of financial and economic variables across countries. We also show that monetary policy shocks seem to affect Latin American stock markets. That evidence is rather weak, though. On the other hand, there is no significant relationship between stock markets and real activity and inflation.
Highlights
The relationship of stock returns to macroeconomic variables is a recurring theme in the financial literature
The objective of this work is to examine the relationship between stock returns and macroeconomic variables through the specification and analysis of autoregressive vectors, extending the article of Lee (1992) to a sample of Latin American countries, as Canova & De Nicoló (1997) did for the United States, United Kingdom, Japan and Germany
The results indicate that inflation in the Granger sense causes negative variations in stock returns, ratifying the hypothesis of Fama (1981) that inflation predicts the variations in real activity and the interest rate
Summary
The relationship of stock returns to macroeconomic variables is a recurring theme in the financial literature. The objective of this work is to examine the relationship between stock returns and macroeconomic variables through the specification and analysis of autoregressive vectors, extending the article of Lee (1992) to a sample of Latin American countries, as Canova & De Nicoló (1997) did for the United States, United Kingdom, Japan and Germany. The countries investigated are Brazil, Chile, Mexico and Argentina. These countries have the best established stock markets in Latin America (Chen et al, 2002). They export similar commodities, have significant trade and substantial mutual investments
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