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Financial Linkages Between the U.S. and Latin Amercia

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  • Srideep Ganguly
  • Roberto Benelli
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    Abstract

    Motivated by recent bursts of global financial market turbulence, this paper investigates the linkages between the financial markets in the United States and those of the seven largest Latin American economies, focusing on the impact of shocks originating in the U.S. stock, bond, and currency markets. After documenting that cross-country linkages were different in "tranquil" and "turbulent" times within our sample, we find that: (i) for stock markets, recent episodes of market turbulence stood out from preceding ones as they showed an increased sensitivity of Latin American markets to U.S. shocks, reversing a trend of weakening linkages; (ii) currency markets in Latin America exhibited a decrease in cross-market linkages with the U.S. during the last episodes of volatility, consistent with increased exchange rate flexibility in the region; and (iii) the external bond markets in Latin America remained on a trend of weakening linkages with U.S. corporate bonds, while they increased their sensitivity to movements in other emerging market bond markets.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/262.

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    Length: 35
    Date of creation: 01 Nov 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/262

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    Related research

    Keywords: Latin America; Stock markets; Flexible exchange rates; stock market; correlations; bond; correlation; financial markets; bond markets; error variance; standard deviation; bond spreads; stock returns; bonds; statistics; stock price; descriptive statistics; stock market volatility; standard errors; corporate bond; financial market; equation; asset markets; stock prices; bond market; sovereign bond; corporate bonds; samples; emerging market bond; financial stability; covariance; market bond; stock market index; financial liberalization; equations; time series; stock market indices; sample mean; financial contagion; financial volatility; standard deviations; equity markets; stock index; stock price index; nominal exchange rate; horizontal axis; treasury bonds; sovereign bond market; corporate bond market; predictability; corporate bond markets; stock price volatilities; high-yield corporate bonds; domestic interest rates; vector autoregression; surveys; high-yield bonds; dummy variable; stock market movements; polynomial; international finance; stock index option; statistical significance; significance levels; probability; government bond; econometrics; computation; emerging market stock; bond index; mathematical statistics; stock market cycles; stock market crash;

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    1. Sebastian Edwards & Javier Gómez Biscarri & Fernando Pérez de Gracia, 2003. "Stock Market Cycles, Financial Liberalization and Volatility," Faculty Working Papers, School of Economics and Business Administration, University of Navarra 08/03, School of Economics and Business Administration, University of Navarra.
    2. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
    3. Fabio Canova, 2003. "The transmission of US shocks to Latin America," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 925, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2004.
    4. Jose Fernandez-Serrano & Simon Sosvilla-Rivero, 2003. "Modelling the linkages between US and Latin American stock markets," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(12), pages 1423-1434.
    5. Chakrabarti, Rajesh & Roll, Richard, 2002. "East Asia and Europe During the 1997 Asian Collapse: A Clinical Study of a Financial Crisis," University of California at Los Angeles, Anderson Graduate School of Management, Anderson Graduate School of Management, UCLA qt09f9j331, Anderson Graduate School of Management, UCLA.
    6. Chakrabarti, Rajesh & Roll, Richard, 2002. "East Asia and Europe during the 1997 Asian collapse: a clinical study of a financial crisis," Journal of Financial Markets, Elsevier, Elsevier, vol. 5(1), pages 1-30, January.
    7. Ng, Angela, 2000. "Volatility spillover effects from Japan and the US to the Pacific-Basin," Journal of International Money and Finance, Elsevier, Elsevier, vol. 19(2), pages 207-233, April.
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