Abstract

LOPEZ HERRERA, Francisco; ORTIZ, Edgar  and  CABELLO, Alejandra. Volatility and return interrelationships among the NAFTA capital stock markets. Inv. Econ [online]. 2009, vol.68, n.267, pp.83-114. ISSN 0185-1667.

Financial liberalization and deregulation have led to increased international portfolio investments at the Mexican Stock Exchange. Additionally, the North American Free Trade Agreement (NAFTA) has played an important role in the integration of the capital markets from Canada, Mexico and United States. This work analyzes returns and volatility relationships among these three markets for a twenty one year period, using daily data from the stock indexes from those markets. A Vector Autoregression (VAR) with an error correction model is used, fitting over time changing correlations and volatilities from these markets. The evidence suggests the presence of a long term equilibrium relationship to which the markets adjust from their contemporaneous deviations showing significant channels of interaction between returns of these share markets. Volatility transmission effects are also identified, from the United States and Canadian markets to the Mexican Stock market; no evidence was found that volatility from the Mexican market influences in a meaningful way the volatility from the other North American markets.

Keywords : stock markets integration; financial markets interdependence; NAFTA capital markets; volatility transmission; emerging markets; Mexico.

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