The present study examines the short term dynamism and long term equilibrium relationship between the stock markets of South and Central America. It also aims to capture the dynamic conditional correlations between the stock markets using weekly returns of market benchmark indices of the respective countries spanning from 2nd week of 1995 to 4th week of December 2015 are analyzed.
The Johansen and Juselius multivariate cointegration test, Granger causality test based vector error correction model (VECM) approach, and variance decomposition analysis were used to investigate the dynamic linkages between markets. GARCH-DCC is used to investigate the Correlation Dynamics.
This study identifies long run co-movements between the stock markets. Chile, Peru and Venezuela are the most dynamically interlinked. The empirical results VECM reveal that Argentina, Brazil, Chile and Venezuela stock market returns are significantly influenced by each other, suggesting a stronger linkages between national stock markets. Cointegration test confirms long-run equilibrium relationship. among the major stock markets of the region. The findings from GARCH-DCC provide evidence consistent with increasing market integration. Stocks exhibit asymmetries in conditional correlations. The results demonstrate that correlations are higher toward the end of the sample period than in the early phase.
On the basis of the results produced by the study, we conclude that there exist opportunities for diversification and investors will benefit from reduction of diversifiable risk among the South and Central American countries in general, but in particular Chile, Peru and Venezuela have not shown the same outcome.
This study has been conducted for a longer period of time and also uses various tools to investigate the dynamic linkages between markets.VAR, VECM, Cointegration and GARCH-DCC altogether in a single study is a rare piece of work.
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve the quality of the article. The usual disclaimer applies.
Panda, A.K. and Nanda, S. (2017), "Market linkages and conditional correlation between the stock markets of South and Central America", Journal of Financial Economic Policy, Vol. 9 No. 02, pp. 174-197. https://doi.org/10.1108/JFEP-08-2016-0063
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