Towards understanding MILA stock markets integration beyond MILA: New evidence between the pre-Global financial crisis and the COVID19 periods

Abstract

This study contributes to the debate on the impact of MILA on its integration objective of MILA (Mercados Integrados Latinoamericanos) stock markets. First, given the inconclusive results of previous studies on the impact of MILA per se on the integration of such stock markets, we provide new evidence by accounting for global events during a longer observation period compared to previous studies: between the pre-Global Financial Crisis (March 2004) and COVID19 (March 2023) periods. Second, we consider close geographical proximity during that observation period by including in our analyses other non-MILA stock markets in Latin America (i.e., Argentina and Brazil), in addition to the usual approach of considering the US as the proxy for international markets. Third we identify and verify structural breakpoints prior to modeling stock returns through dynamic correlations. Finally, we test robustness of results through CCC, VCC, in addition to the usual approach of using DCC GARCH models. Fourth, our analysis is based on real returns rather than nominal. Key findings are as follows. First, except for Colombia, LATAM stock markets tend to respond identically to a series of major global events. Second, crisis periods, both GFC and Covid19, were associated with increased volatility and correlation despite mixed correlation outcomes during Covid19. However, whereas real returns dropped during the GCF, it was the contrary during Covid19. Third, regarding the effect of MILA there were changes in returns, volatility, and correlation during MILA periods, and they are consistent for all markets, including non-MILA markets. We, therefore, consider MILA events as coincidences during the two global events, just like other events from the GFC and Covid19. Fourth, the Colombian stock market is segmented from other markets throughout the covered period. We discuss these findings by highlighting possible policy implications and uncover some areas for further research towards searching robust solutions to market integration in the region.