Virtual Integration of Financial Markets: A Dynamic Correlation Analysis of the Creation of the Latin American Integrated Market

Mellado, Cristhian and Escobari, Diego (2014): Virtual Integration of Financial Markets: A Dynamic Correlation Analysis of the Creation of the Latin American Integrated Market. Forthcoming in: Applied Economics

Abstract

This paper investigates the role of virtual integration of financial markets on stock market return co-movements. In May of 2011 the Chilean, Colombian, and Peruvian stock markets virtually integrated their stock exchanges and central securities depositories to form the Latin American Integrated Market (MILA). We utilize the dynamic conditional correlation model propose by Engle (2002) to identify a statistically significant positive correlation between these markets. Moreover, we find strong evidence that the creation of the MILA increased the levels of dynamic correlation between stock returns. A higher correlation was also found during the dot-com bubble and the 2007 financial crises. Our results imply a decline in gains from international diversification by holding portfolios consisting of diverse stocks of these countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Latin American Integrated Market, Dynamic conditional correlation, Integration.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C10 - General; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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