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Effects of MILA on their stock markets: an empirical analysis on market activity and dynamic correlations

Author

Listed:
  • Jorge Andrés Muñoz Mendoza
  • Sandra María Sepúlveda Yelpo
  • Carmen Lissette Velosos Ramos
  • Carlos Leandro Delgado Fuentealba

Abstract

Purpose - The purpose of this article is to analyze the effects of the integration process for the Integrated Market of Latin America (MILA) on its stock markets behavior as well as their degree of integration. Design/methodology/approach - Daily time series data were used for stock returns, volatility, volume and the number of transactions and securities between August 16, 2007 and December 28, 2018. A DCC-MGARCH model was applied to analyze the impact of MILA on stock market behavior and predict dynamic correlations. A GARCH (1,1) model was used to determine the effect of MILA on co-movements between markets. Finally, a Markov regime switching model was used for robustness analysis. Findings - MILA increased stock market activity in terms of volume, transactions and securities traded. However, it reduced returns and volatility. MILA had significant effects on the dynamic correlations between regional stock markets. After the integration process, the dynamic correlations of returns and volatility were reduced, but those related to volume, transactions and securities traded increased. Mexico's subsequent entry into MILA further reduced market volatility, but it did not have relevant effects on markets' co-movements. Originality/value - These results are relevant for investors and policymakers. MILA has benefited the markets by promoting stock market activity, reducing risk, creating a margin for diversification and limiting risk contagion between them. These results help to guide investment decisions due to the fact that MILA's benefits in terms of regional diversification would be greater in some markets.

Suggested Citation

  • Jorge Andrés Muñoz Mendoza & Sandra María Sepúlveda Yelpo & Carmen Lissette Velosos Ramos & Carlos Leandro Delgado Fuentealba, 2020. "Effects of MILA on their stock markets: an empirical analysis on market activity and dynamic correlations," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 17(2), pages 574-599, November.
    • Handle: RePEc:eme:ijoemp:ijoem-12-2019-1070
    DOI: 10.1108/IJOEM-12-2019-1070
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    Citations

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    Cited by:

    1. Ali Fayyaz Munir & Shahrin Saaid Shaharuddin & Mohd Edil Abd Sukor & Mohamed Albaity & Izlin Ismail, 2021. "Financial liberalization and the behavior of reversals in emerging market economies," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 17(6), pages 1565-1582, January.

    More about this item

    Keywords

    Market integration; Returns; Volatility; Stock activity; Correlations; G11; G15; G28;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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