TRANSMISSION OF RISK ACROSS STOCK MARKETS IN LATIN AMERICA

Abstract

In the folklore, it is generally accepted that ali the Latin American stock markets suffered as a result of the crisis of the Mexican economy during 1994-1995. The media coined a name for it: "tequila effect" . This well accepted "folk theory" implicitly assumes the stock markets in the world are in fact integrated and the risk transmission mechanism is well understood. In this investigation, we examine the transmission mechanism in a well-defined statistical sense (Granger causality). We develop methods for measuring the transmission mechanism. We also examine the relationship among sorne stock markets using daily data for Latin American countries (such as Argentina, Brazil, Colombia, Chile, Mexico and Venezuela) of stock market indexes between 1994 and 1998. This period contains severa! large upheavals in the market indexes for many of the Latin American countries. Our results of Granger causality uncover many relationships very clearly.