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Macroeconomic shocks and the co-movement of stock returns in Latin America

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  • Araújo, Eurilton

Abstract

This paper studies the economic sources underlying the co-movement of real stock returns in Latin America. Following the literature on structural vector autoregressive models (SVARs), I use long-run restrictions to identify three structural shocks: demand, supply, and portfolio shocks. For some countries, portfolio shocks are important factors behind real stock returns. Furthermore, these shocks seem to be important in explaining cross-country co-movement patterns. However, these findings are not statistically strong due to the degree of uncertainty about the estimates of the importance of each structural shock and the cross-correlation coefficients. Therefore, macroeconomic shocks (supply and demand) cannot be neglected in accounting for the dynamics of real stock returns.

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Bibliographic Info

Article provided by Elsevier in its journal Emerging Markets Review.

Volume (Year): 10 (2009)
Issue (Month): 4 (December)
Pages: 331-344

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Handle: RePEc:eee:ememar:v:10:y:2009:i:4:p:331-344

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Web page: http://www.elsevier.com/locate/inca/620356

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Keywords: Real stock returns Structural shocks Co-movement;

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References

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  1. Liam Gallagher, 1999. "A multi-country analysis of the temporary and permanent components of stock prices," Applied Financial Economics, Taylor & Francis Journals, vol. 9(2), pages 129-142.
  2. Fabio Canova & Gianni de Nicolo, 1997. "Stock returns, term structure, inflation and real activity: An international perspective," Economics Working Papers 203, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Bekaert, Geert & Harvey, Campbell R., 2002. "Research in emerging markets finance: looking to the future," Emerging Markets Review, Elsevier, Elsevier, vol. 3(4), pages 429-448, December.
  4. John Y. Campbell, 1990. "A Variance Decomposition for Stock Returns," NBER Working Papers 3246, National Bureau of Economic Research, Inc.
  5. Hess, Patrick J & Lee, Bong-Soo, 1999. "Stock Returns and Inflation with Supply and Demand Disturbances," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1203-18.
  6. Fraser, Patricia & Groenewold, Nicolaas, 2006. "US share prices and real supply and demand shocks," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 46(1), pages 149-167, February.
  7. Jose Pagan & Gokce Soydemir, 2000. "On the linkages between equity markets in Latin America," Applied Economics Letters, Taylor & Francis Journals, vol. 7(3), pages 207-210.
  8. Li Yang & Francis Tapon & Yiguo Sun, 2006. "International correlations across stock markets and industries: trends and patterns 1988-2002," Applied Financial Economics, Taylor & Francis Journals, vol. 16(16), pages 1171-1183.
  9. Chen, Gong-meng & Firth, Michael & Meng Rui, Oliver, 2002. "Stock market linkages: Evidence from Latin America," Journal of Banking & Finance, Elsevier, vol. 26(6), pages 1113-1141, June.
  10. Du, Ding, 2006. "Monetary policy, stock returns and inflation," Journal of Economics and Business, Elsevier, Elsevier, vol. 58(1), pages 36-54.
  11. Rapach, David E., 2001. "Macro shocks and real stock prices," Journal of Economics and Business, Elsevier, Elsevier, vol. 53(1), pages 5-26.
  12. Choudhry, Taufiq, 2001. "Inflation and rates of return on stocks: evidence from high inflation countries," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 11(1), pages 75-96, March.
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Cited by:
  1. Piljak, Vanja, 2013. "Bond markets co-movement dynamics and macroeconomic factors: Evidence from emerging and frontier markets," Emerging Markets Review, Elsevier, Elsevier, vol. 17(C), pages 29-43.
  2. Guneratne Wickremasinghe, 2011. "The Sri Lankan stock market and the macroeconomy: an empirical investigation," Studies in Economics and Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 28(3), pages 179-195, August.
  3. Syllignakis, Manolis N. & Kouretas, Georgios P., 2011. "Dynamic correlation analysis of financial contagion: Evidence from the Central and Eastern European markets," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 717-732, October.
  4. Walid, Chkili & Chaker, Aloui & Masood, Omar & Fry, John, 2011. "Stock market volatility and exchange rates in emerging countries: A Markov-state switching approach," Emerging Markets Review, Elsevier, Elsevier, vol. 12(3), pages 272-292, September.

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