IDEAS home Printed from
   My bibliography  Save this article

Investor perceptions and equity-sovereign bond return correlation: revisiting the Mexican Peso Crisis


  • James Refalo
  • Hsing Fang
  • Jong Yi
  • Golak C. Nath


We investigate evidence of state-dependent correlation between Mexican Brady bond and Mexican Equity Fund returns between November 1990 and March 2000. During this timeframe, the Mexican capital market can be characterized by three distinct periods: pre-Peso crisis (November 1990--April 1993), the crisis years (May 1993--December 1996), and a period of recovery following the crisis. We find a statistical increase in correlation of returns from these instruments during the period surrounding the Peso crisis, and show that the correlation preceded the collapse of the Peso by 20 months. We also find that common fundamentals fail to explain the source of this correlation. However, using a regime switching model, state-dependent investor perceptions embedded in the Brady returns can explain the correlation pattern. Our evidence implies that time-varying correlation between debt and equity securities may be driven primarily by state-dependent investor perceptions about bond risk.

Suggested Citation

  • James Refalo & Hsing Fang & Jong Yi & Golak C. Nath, 2012. "Investor perceptions and equity-sovereign bond return correlation: revisiting the Mexican Peso Crisis," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 5(1), pages 78-93, September.
  • Handle: RePEc:taf:macfem:v:5:y:2012:i:1:p:78-93
    DOI: 10.1080/17520843.2011.624526

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

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

    More about this item


    Access and download statistics


    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:taf:macfem:v:5:y:2012:i:1:p:78-93. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.