IDEAS home Printed from https://ideas.repec.org/a/eee/ememar/v39y2019icp1-17.html
   My bibliography  Save this article

Stock pricing in Latin America: The synchronicity effect

Author

Listed:
  • Figlioli, Bruno
  • Lima, Fabiano Guasti

Abstract

This paper investigated whether the stock price synchronicity level (SPSL) is a pricing factor in the Latin American scenario. To do so, the shares with the highest liquidity level listed in the stock exchange in five Latin American (LA) countries (Argentina, Brazil, Chile, Mexico and Peru) were used. The results indicated that the SPSL is associated with a positive premium. This premium was obtained by the CAPM model and by the Fama-French three- and five-factor models. There was evidence that the average SPSL increases in periods of greater turmoil in the financial markets. Moreover, it was found that the SPSLs are not associated monotonically with the efficiency levels of stock prices. Overall, the use of the SPSL factor in asset pricing models reduced the bias in estimating the stock premiums in LA.

Suggested Citation

  • Figlioli, Bruno & Lima, Fabiano Guasti, 2019. "Stock pricing in Latin America: The synchronicity effect," Emerging Markets Review, Elsevier, vol. 39(C), pages 1-17.
    • Handle: RePEc:eee:ememar:v:39:y:2019:i:c:p:1-17
    DOI: 10.1016/j.ememar.2019.03.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1566014118303741
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ememar.2019.03.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. "Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
    3. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    4. Fama, Eugene F. & French, Kenneth R., 2017. "International tests of a five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 123(3), pages 441-463.
    5. Novy-Marx, Robert, 2013. "The other side of value: The gross profitability premium," Journal of Financial Economics, Elsevier, vol. 108(1), pages 1-28.
    6. Kewei Hou & Tobias J. Moskowitz, 2005. "Market Frictions, Price Delay, and the Cross-Section of Expected Returns," The Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 981-1020.
    7. repec:idb:brikps:59598 is not listed on IDEAS
    8. Alberto Chong & Florencio López-de-Silanes, 2007. "Investor Protection and Corporate Governance : Firm-Level Evidence Across Latin America," World Bank Publications - Books, The World Bank Group, number 6769, December.
    9. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, vol. 79(2), pages 257-292, February.
    10. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    11. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 773-816.
    12. Khanna, Tarun & Thomas, Catherine, 2009. "Synchronicity and firm interlocks in an emerging market," Journal of Financial Economics, Elsevier, vol. 92(2), pages 182-204, May.
    13. Foye, James, 2018. "A comprehensive test of the Fama-French five-factor model in emerging markets," Emerging Markets Review, Elsevier, vol. 37(C), pages 199-222.
    14. Hui Guo & Robert Savickas, 2008. "Average Idiosyncratic Volatility in G7 Countries," The Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1259-1296, May.
    15. Chelley-Steeley, Patricia L. & Lambertides, Neophytos, 2016. "Cost of capital changes, the quality of trading information and market architecture," The British Accounting Review, Elsevier, vol. 48(4), pages 401-414.
    16. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2007. "Liquidity and Expected Returns: Lessons from Emerging Markets," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1783-1831, November.
    17. Xing, Xuejing & Anderson, Randy, 2011. "Stock price synchronicity and public firm-specificinformation," Journal of Financial Markets, Elsevier, vol. 14(2), pages 259-276, May.
    18. Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009. "High idiosyncratic volatility and low returns: International and further U.S. evidence," Journal of Financial Economics, Elsevier, vol. 91(1), pages 1-23, January.
    19. Patrick J. Kelly, 2014. "Information Efficiency and Firm-Specific Return Variation," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 1-44.
    20. Ricardo N. Bebczuk & André L. Carvalhal da Silva & Alberto E. Chong & Juan José Cruces & Urbi Garay & Maximiliano González & Luis H. Gutiérrez & Enrique Kawamura & Ricardo P. C. Leal & Fernando Lefort, 2007. "Investor Protection and Corporate Governance: Firm-level Evidence across Latin America," IDB Publications (Books), Inter-American Development Bank, number 59598 edited by Alberto E. Chong & Florencio López-de-Silanes, February.
    21. Escobari, Diego & Garcia, Sergio & Mellado, Cristhian, 2017. "Identifying bubbles in Latin American equity markets: Phillips-Perron-based tests and linkages," Emerging Markets Review, Elsevier, vol. 33(C), pages 90-101.
    22. Roll, Richard, 1977. "A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory," Journal of Financial Economics, Elsevier, vol. 4(2), pages 129-176, March.
    23. Bittencourt, Manoel, 2012. "Financial development and economic growth in Latin America: Is Schumpeter right?," Journal of Policy Modeling, Elsevier, vol. 34(3), pages 341-355.
    24. Donadelli, Michael & Persha, Lauren, 2014. "Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty," Research in International Business and Finance, Elsevier, vol. 30(C), pages 284-309.
    25. Art Durnev & Randall Morck & Bernard Yeung, 2004. "Value-Enhancing Capital Budgeting and Firm-specific Stock Return Variation," Journal of Finance, American Finance Association, vol. 59(1), pages 65-105, February.
    26. Laura L. Veldkamp, 2006. "Information Markets and the Comovement of Asset Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 823-845.
    27. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
    28. Fuenzalida, Darcy & Mongrut, Samuel, 2010. "Estimation Of Discount Rates In Latin America: Empirical Evidence And Challenges," Journal of Economics, Finance and Administrative Science, Universidad ESAN, vol. 15(28), pages 7-43.
    29. Xinshen Diao & Margaret McMillan & Dani Rodrik, 2019. "The Recent Growth Boom in Developing Economies: A Structural-Change Perspective," Springer Books, in: Machiko Nissanke & José Antonio Ocampo (ed.), The Palgrave Handbook of Development Economics, chapter 9, pages 281-334, Springer.
    30. Grandes, Martin & Panigo, Demian T. & Pasquini, Ricardo A., 2010. "On the estimation of the cost of equity in Latin America," Emerging Markets Review, Elsevier, vol. 11(4), pages 373-389, December.
    31. John M. Griffin, 2002. "Are the Fama and French Factors Global or Country Specific?," The Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 783-803.
    32. Marcet, Francisco, 2017. "Analyst coverage network and stock return comovement in emerging markets," Emerging Markets Review, Elsevier, vol. 32(C), pages 1-27.
    33. Ball, Ray & Gerakos, Joseph & Linnainmaa, Juhani T. & Nikolaev, Valeri, 2016. "Accruals, cash flows, and operating profitability in the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 121(1), pages 28-45.
    34. Merton, Robert C, 1987. "A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
    35. Leite, André Luis & Klotzle, Marcelo Cabus & Pinto, Antonio Carlos Figueiredo & da Silva, Aldo Ferreira, 2018. "Size, value, profitability, and investment: Evidence from emerging markets," Emerging Markets Review, Elsevier, vol. 36(C), pages 45-59.
    36. Amit Goyal & Pedro Santa-Clara, 2003. "Idiosyncratic Risk Matters!," Journal of Finance, American Finance Association, vol. 58(3), pages 975-1008, June.
    37. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
    38. Dasgupta, Sudipto & Gan, Jie & Gao, Ning, 2010. "Transparency, Price Informativeness, and Stock Return Synchronicity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(5), pages 1189-1220, October.
    39. Christopher S. Armstrong & John E. Core & Daniel J. Taylor & Robert E. Verrecchia, 2011. "When Does Information Asymmetry Affect the Cost of Capital?," Journal of Accounting Research, Wiley Blackwell, vol. 49(1), pages 1-40, March.
    40. De-la-Hoz, Maria Camila & Pombo, Carlos, 2016. "Institutional investor heterogeneity and firm valuation: Evidence from Latin America," Emerging Markets Review, Elsevier, vol. 26(C), pages 197-221.
    41. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    42. John Lintner, 1965. "Security Prices, Risk, And Maximal Gains From Diversification," Journal of Finance, American Finance Association, vol. 20(4), pages 587-615, December.
    43. Kewei Hou & Chen Xue & Lu Zhang, 2015. "Editor's Choice Digesting Anomalies: An Investment Approach," The Review of Financial Studies, Society for Financial Studies, vol. 28(3), pages 650-705.
    44. Söhnke M. Bartram & Gregory Brown & René M. Stulz, 2009. "Why Do Foreign Firms Have Less Idiosyncratic Risk than U.S. Firms?," NBER Working Papers 14931, National Bureau of Economic Research, Inc.
    45. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    46. Roggi, Oliviero & Giannozzi, Alessandro & Baglioni, Tommaso, 2017. "Valuing emerging markets companies: New approaches to determine the effective exposure to country risk," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 553-567.
    47. Artyom Durnev & Randall Morck & Bernard Yeung & Paul Zarowin, 2003. "Does Greater Firm‐Specific Return Variation Mean More or Less Informed Stock Pricing?," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 797-836, December.
    48. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross‐Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, February.
    49. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    50. Aabo, Tom & Pantzalis, Christos & Park, Jung Chul, 2017. "Idiosyncratic volatility: An indicator of noise trading?," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 136-151.
    51. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    52. Titman, Sheridan & Wei, K. C. John & Xie, Feixue, 2004. "Capital Investments and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(4), pages 677-700, December.
    53. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    54. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    55. Cakici, Nusret & Fabozzi, Frank J. & Tan, Sinan, 2013. "Size, value, and momentum in emerging market stock returns," Emerging Markets Review, Elsevier, vol. 16(C), pages 46-65.
    56. Lin, Karen Jingrong & Karim, Khondkar E. & Carter, Clairmont, 2015. "Why does China's stock market have highly synchronous stock price movements? An information supply perspective," Advances in accounting, Elsevier, vol. 31(1), pages 68-79.
    57. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    58. Maureen O'Hara, 2003. "Presidential Address: Liquidity and Price Discovery," Journal of Finance, American Finance Association, vol. 58(4), pages 1335-1354, August.
    59. Gregory, Alan & Hua, Shan & Tharyan, Rajesh, 2018. "In search of beta," The British Accounting Review, Elsevier, vol. 50(4), pages 425-441.
    60. Chan, Kalok & Hameed, Allaudeen, 2006. "Stock price synchronicity and analyst coverage in emerging markets," Journal of Financial Economics, Elsevier, vol. 80(1), pages 115-147, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Li, Mingsheng & Liu, Desheng & Peng, Hongfeng & Zhang, Luxiu, 2020. "Does low synchronicity mean more or less informative prices? Evidence from an emerging market," Journal of Financial Stability, Elsevier, vol. 51(C).
    2. Figlioli, Bruno & Lemes, Sirlei & Lima, Fabiano Guasti, 2020. "In search for good news: The relationship between accounting information, bounded rationality and hard-to-value stocks," Emerging Markets Review, Elsevier, vol. 44(C).
    3. Gaganis, Chrysovalantis & Leledakis, George & Pasiouras, Fotios & Pyrgiotakis, Emmanouil, 2021. "National culture of secrecy and stock price synchronicity: Cross-country evidence," MPRA Paper 105432, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, December.
    2. Zhong, Angel, 2018. "Idiosyncratic volatility in the Australian equity market," Pacific-Basin Finance Journal, Elsevier, vol. 50(C), pages 105-125.
    3. Mbengue, Mohamed Lamine & Ndiaye, Bara & Sy, Oumar, 2023. "Which factors explain African stock returns?," Finance Research Letters, Elsevier, vol. 54(C).
    4. Chue, Timothy K. & Gul, Ferdinand A. & Mian, G. Mujtaba, 2019. "Aggregate investor sentiment and stock return synchronicity," Journal of Banking & Finance, Elsevier, vol. 108(C).
    5. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    6. Hanauer, Matthias X. & Lauterbach, Jochim G., 2019. "The cross-section of emerging market stock returns," Emerging Markets Review, Elsevier, vol. 38(C), pages 265-286.
    7. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    8. Joachim Gassen & Hollis A. Skaife & David Veenman, 2020. "Illiquidity and the Measurement of Stock Price Synchronicity," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 419-456, March.
    9. Yunting Liu, 2022. "The Short-Run and Long-Run Components of Idiosyncratic Volatility and Stock Returns," Management Science, INFORMS, vol. 68(2), pages 1573-1589, February.
    10. Kewei Hou & Chen Xue & Lu Zhang, 2017. "Replicating Anomalies," NBER Working Papers 23394, National Bureau of Economic Research, Inc.
    11. Wu, Yuliang & Mazouz, Khelifa, 2016. "Long-term industry reversals," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 236-250.
    12. Kaserer Christoph & Hanauer Matthias X., 2017. "25 Jahre Fama-French-Modell: Erklärungsgehalt, Anomalien und praktische Implikationen," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 18(2), pages 98-116, June.
    13. Mosoeu, Selebogo & Kodongo, Odongo, 2022. "The Fama-French five-factor model and emerging market equity returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 55-76.
    14. Berggrun, Luis & Cardona, Emilio & Lizarzaburu, Edmundo, 2020. "Firm profitability and expected stock returns: Evidence from Latin America," Research in International Business and Finance, Elsevier, vol. 51(C).
    15. Jiaju Miao & Pawel Polak, 2023. "Online Ensemble of Models for Optimal Predictive Performance with Applications to Sector Rotation Strategy," Papers 2304.09947, arXiv.org.
    16. Van Ness, Bonnie & Van Ness, Robert & Yildiz, Serhat, 2021. "Private information in trades, R2, and large stock price movements," Journal of Banking & Finance, Elsevier, vol. 131(C).
    17. Woon Sau Leung & Nicholas Taylor, 2013. "Testing for contagion: the impact of US structured markets on international financial markets," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 11, pages 256-284, Edward Elgar Publishing.
    18. Hanauer, Matthias X. & Kalsbach, Tobias, 2023. "Machine learning and the cross-section of emerging market stock returns," Emerging Markets Review, Elsevier, vol. 55(C).
    19. Sebastien Valeyre, 2020. "Refined model of the covariance/correlation matrix between securities," Papers 2001.08911, arXiv.org.
    20. Aboulamer, Anas & Kryzanowski, Lawrence, 2016. "Are idiosyncratic volatility and MAX priced in the Canadian market?," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 20-36.

    More about this item

    Keywords

    Synchronicity; Idiosyncratic risk; Latin America; Market efficiency;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ememar:v:39:y:2019:i:c:p:1-17. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620356 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.