Virtual integration of financial markets: a dynamic correlation analysis of the creation of the Latin American Integrated Market

Cristhian Mellado · Diego Escobari

37 citations0/0 files storedApplied Economics

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Financial Risk and Volatility Modeling Financial Markets and Investment Strategies Market Dynamics and Volatility

Abstract

This article 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 proposed 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.

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References

2002Dynamic Conditional Correlation 1992ARCH modeling in finance 2007Dynamic correlation analysis of financial contagion: Evidence from Asian markets 2003Emerging markets finance 2009Global market integration: An alternative measure and its application☆2007Characterizing World Market Integration through Time 2002Stock market linkages: Evidence from Latin America 2011Dynamic correlation analysis of financial contagion: Evidence from the Central and Eastern European markets

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2017Identifying bubbles in Latin American equity markets: Phillips-Perron-based tests and linkages 2021Sustainability engagement in Latin America firms and cost of equity 2021Impact of earnings management on agency costs: evidence from MILA markets 2017Is the Virtual Integration of Financial Markets Beneficial in Emerging Markets? Evidence from MILA

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