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Long-Run Inflation and Exchange Rates Hedge of Stocks in Brazil and Mexico

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Author Info
Edgar Ortiz (Universidad Nacional Autónoma de México)
Alejandra Cabello (Universidad Nacional Autónoma de México)
Raúl de Jesús (Universidad Nacional Autónoma de México)

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Abstract

A substantial body of evidence documents the relationship between macroeconomic variables and stock returns and risk from developed countries. The evidence for emerging markets is limited, particularly identifying risk premia compensations for inflation and exchange rates. This paper attempts to quantify the short and long term relationship between inflation and exchange rates with over all stock market performance for the case of the two largest Latin American capital markets, Mexico and Brazil. Extending the Fisher model, the aim is to determine whether or not these markets have failed to keep pace with movements in those two variables (the most unstable and economic growth hampering variables in these economies during the last three decades), and therefore to what extent the stock market succeeds or fails to test as inflation hedges. The empirical evidence is presented assuming positioning of a local investor in their own market, and from the point of view of a U.S. investor in each of these markets. Two unit root tests are also presented to stress long term relationships between stock returns, inflation, and foreign exchange.

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Publisher Info
Article provided by International Trade and Finance Association in its journal Global Economy Journal.

Volume (Year): 6 (2007)
Issue (Month): 3 ()
Pages: 6
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Handle: RePEc:bep:glecon:6:2007:3:6

Note: oai:bepress.com:gej-1188
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Related research
Keywords: Mexico Brazil emerging markets inflation exchange rates stock returns Fisher Theorem exchange rates hedge of stocks

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  12. Kim, Ki-ho, 2003. "Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model," Review of Financial Economics, Elsevier, vol. 12(3), pages 301-313. [Downloadable!] (restricted)
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  15. Bolten, Steven E & Weigand, Robert A, 1998. "The Generation of Stock Market Cycles," The Financial Review, Eastern Finance Association, vol. 33(1), pages 77-83, February.
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