Dynamic Stock Market Interactions between the Canadian, Mexican, and the United States Markets: The NAFTA Experience
STOCK RETURNS: CYCLICALITY, PREDICTION, AND ECONOMIC CONSEQUENNCES, G. I. Ellison, ed., Nova Science Publishers, Inc., 4th Quarter 2009
94 Pages Posted: 23 Jan 2009 Last revised: 20 Jan 2010
Date Written: January 15, 2010
This paper explores the dynamic linkages that portray different facets of the joint probability distribution of stock market returns in NAFTA (i.e., Canada, Mexico, and the US). Our examination of interactions of the NAFTA stock markets considers three issues. First, we examine the long-run relationship between the three markets, using cointegration techniques. Second, we evaluate the dynamic relationships between the three markets, using impulse-response analysis. Finally, we explore the volatility transmission process between the three markets, using a variety of multivariate GARCH models. Our results also exhibit significant volatility transmission between the second moments of the NAFTA stock markets, albeit not homogenous. The magnitude and trend of the conditional correlations indicate that in the last few years, the Mexican stock market exhibited a tendency toward increased integration with the US market. Finally, we do note that evidence exists that the Peso and Asian financial crises as well as the stock-market crash in the US affect the return and volatility time-series relationships.
Keywords: NAFTA stock markets, cointegration, impulse response, volatility transmission
JEL Classification: G10, C30, C50
Suggested Citation: Suggested Citation