What Explains the Returns in the Mexican Stock Market?

ProQuest Dissertations and Theses (1999)

174 Pages Posted: 25 Mar 2014

See all articles by Mauricio Cervantes

Mauricio Cervantes

Instituto Tecnolo´gico y de Estudios Superiors de Monterrey

Date Written: June 12, 1999

Abstract

The main objective of this paper is to develop an asset pricing model for the Mexican stock market during the period of July 1989 to December 1998. Asset pricing theory has been a topic of debate in the United States for over thirty years and consensus has not been reached. Pursuit of empirical research in pricing models is a priority in order to increase knowledge of how the market functions and to improve market regulations. Empirical research of the Mexican financial markets is scarce. The results presented in this paper suggest that the CAPM is rejected and a five-factor model is not rejected. The factors are: market index, size, book-to-market equity ratio, momentum, and peso/dollar exchange rate. The results are robust to: the use of returns in dollars or pesos; the inclusion or exclusion of the December 1994 devaluation and the economic after-shock; and the use of value-weighted or equally- weighted market indices. This may be the first study using the mimicking factor approach to describe exchange rate risk. The exchange rate is also tested using the traditional macroeconomic variables as factors technique. With both techniques the beta-loadings are significant and the premium is positive and statistically significant. It is important to find if the beta-loading or the characteristic per se of the factors explain the returns. However, the low number of stocks in the Mexican stock market did not allow the test to clearly discriminate between the beta-loading or the characteristic. This dissertation opens lines of future research in portfolio evaluation, event studies, and corporate finance. The results indicate that additional investigation is required to discriminate between factor beta-loading or characteristics.

Keywords: Capital Asset Pricing Models, Multifactor Models, Foreign Exchange Rate Risk, Emerging Markets, Mexico.

Suggested Citation

Cervantes-Zepeda, Mauricio, What Explains the Returns in the Mexican Stock Market? (June 12, 1999). ProQuest Dissertations and Theses (1999), Available at SSRN: https://ssrn.com/abstract=2414018

Mauricio Cervantes-Zepeda (Contact Author)

Instituto Tecnolo´gico y de Estudios Superiors de Monterrey ( email )

Ramon Corona 2514
Zapopan, Jal. 45201
Mexico
+52 3336693000 (Phone)

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