Analysis of volatility and contagion effect of countries from Latin America

Guilherme Freitas Cardoso, Guilherme Santos Souza, Luciano Ferreira Carvalho, Karem Cristina de Sousa Ribeiro


Objective: The volatility is a concern for investigators and scholars, both trying to understand and predict with a logical way the dispersion of returns for a given security or market index, but these movements have shown irregular, complex, and increasingly less influence of individual factors. Thus, the research investigates the volatility of the returns and checks out the comovements and countries’ contagion effects from Latin America.
Methodology: The sample comprises daily data from January 2002 to December 2016 to measure the volatility of countries’ stock exchanges from Latin America. An Autoregressive model with Conditional Heteroscedasticity - ARCH/GARCH models – was used to measure the volatility. To check the stock exchanges’ contagion effects we used volatility models, vector autoregression models (VAR).
Originality: The impact and behavior of volatility over the markets have been a significant concern for researchers and practitioners regarding the returns’ spread. To better understating the contagion in emerging markets, specifically, the Latin American markets may present as a diversification opportunity to investors, and a set of rules be implemented to improve these markets’ regulations.
Main results: The results indicate evidence of a contagion effect, which it was observed in all countries, with two facts being relevant, the first is the influence of the Brazilian stock exchange in all other countries in the sample and, lastly, the low representativeness of endogenous factors to explain the volatility behavior of the stock exchange from Mexico. Also, it demonstrates that during the period of higher volatility, subprime crisis, the correlations displayed higher volatility between than during the other periods, which demonstrated that diversification benefits decrease during more volatile periods. It was found that the Brazilian stock exchange has a significant influence on Argentina. The same influence is not observed when analyzing the strength of the Argentine stock exchange over the Brazilian stock market.
Theoretical Contributions: Better understanding of volatility and its ripples effects among the Latin American markets are relevant to investors and policymakers concerning the flow of investments and enforcement of regulations. Also, we provide evidence of during the period of higher volatility, the diversification benefits decrease. Moreover, the contagion effect was observed in all countries, with two facts being relevant. The first one is the influence of the Brazilian stock exchange in all other countries in the sample and the low representativeness of endogenous factors to explain the volatility behavior of Mexico’s stock exchange.


Volatility; Comovements; Contagion effect.

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