Stock Market Co-Movement in Latin America

14 Pages Posted: 1 Apr 2012 Last revised: 22 May 2012

See all articles by Otavio Ribeiro de Medeiros

Otavio Ribeiro de Medeiros

University of Brasilia

Vitor Leone

Leicseter Castle Business School

Date Written: March 31, 2012


This paper investigates co-movement in eight Latin-American stock markets (Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, and Venezuela) using common factor analysis. The common factors are obtained using principal component analysis (PCA) and therefore account for the maximum portion of the variance present in the stock exchanges investigated. We test for co-movement in different periods so as to ascertain any changes that have taken place from one period to the next. In particular, we examine rolling windows with 5-year, 3-year, 2-year, and 1-year periods. We also specify and estimate a vector autoregressive (VAR) model and test for co-movement between the eight markets during the sample period by means impulse response functions. The results of both methods show that co-movement between the exchanges over the entire sample period does not converge. However, we find evidence of an increasing co-movement from 2002 to 2008, which implies a growing integration between these markets. However, the trend towards increasing integration between the stock markets seems to have suffered a setback in 2008 due to the world financial crisis. Since then, a possible resume to the trend of increasing integration is unclear. The impulse response analysis shows that Argentina, Brazil, Chile, Colombia, Mexico and Peru present moderate response to shocks in each other’s markets and very low responses to shocks in Ecuador and Venezuela’s markets. Also, responses of Ecuador and Venezuela’s market returns to shocks in the other markets are very low.

Keywords: Stock Market, Co-movement, Latin America, Principal Components, VAR

JEL Classification: C10, C32, F02, G12, G2, G14, G15, G17, N20, N26

Suggested Citation

de Medeiros, Otavio Ribeiro and Leone, Vitor, Stock Market Co-Movement in Latin America (March 31, 2012). Available at SSRN: or

Otavio Ribeiro De Medeiros (Contact Author)

University of Brasilia ( email )

Campus Universitario Darcy Ribeiro
Gleba A - Reitoria
Brasilia, DF 70910-900


Vitor Leone

Leicseter Castle Business School ( email )

The Gateway
Leicester, LE1 9BH
United Kingdom

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