آزاد سازی مالی، نرخ ارز و قیمت سهام: شوک های خارجی در چهار کشور امریکای لاتین

This paper provides an analysis of the long-run relationships and short-run dynamics between stock prices and exchange rates as well as the channels through which exogenous shocks influence these markets. We use monthly data for the period January 1980 to February 2009 for four Latin America, namely, Argentina, Brazil, Chile and Mexico. We conduct our analysis by means of cointegration analysis and multivariate Granger causality tests. The main finding of our analysis suggests that stock and foreign exchange markets in these economies are positively related and that the U.S. stock market acts as a channel for these links. Moreover, it is shown that these links are independent of foreign exchange restrictions. Finally, stability tests proposed by Hansen and Johansen (1993) are applied and it is shown that the dimension of the cointegration space is sample independent while the estimated coefficients exhibit instability in recursive estimations. Instability in these long-run relationships is evident during the Mexican currency crisis of 1994–1995, the Asian crisis of 1997 and the 2007–2009 credit and financial crisis.

During the last fifteen years we have witnessed a substantial development in the structure of both mature and emerging financial markets. The emerging markets have been in the center of interest of private and institutional investors as well as portfolio managers. More specifically this growing interest has come from the recognition of the important positive link between the process of financial liberalization in which these economies have undergone and economic development. The flow of portfolio investments to emerging financial has increased from a mere $6.2 billion in 1987 to $37.2 billion in 1992 to a total of $211.6 for the period 2000–2006 (Bank of International Settlements, 2008). The flow of these funds has been mainly directed to bonds, certificates of deposit and commercial papers although during the recent period there is a major shift towards investing on stocks. The four largest economies of Latin America namely, Argentina, Brazil, Chile and Mexico, have been over this period main recipients of capital flows directed to portfolio investments especially since the late 1980s and early 1990s when their economies became much more open. This trend was further magnified by the capital liberalization and privatization process that was initiated in the early 1990s and it was not interrupted even during the 1994–1995 currency crisis of Mexico although it was put under doubt during the 1997–1998 Asian and Russian financial crisis. The economic growth of the Latin America region as a result of the openness and financial liberalization became obvious by the fact that several Latin American countries exhibit substantial increase in their exports growth (Bekaert and Harvey, 2000, Bekaert et al., 2006, Grilli, 2005 and Salvatore, 2001). Another consequence of the openness of these economies during this period was the efforts to implement a framework for economic and monetary integration initially between Argentina and Brazil and later with the creation of the Mercosur between Argentina, Brazil, Paraguay and Uruguay. However, this integration process has remained incomplete mainly due to the currency devaluation, sovereign debt default and a freeze on bank accounts that Argentina faced in the late 1990s after a 10 year period of devaluation. This process was further delayed during the Brazilian currency and the subsequent devaluation. These exchange rate movements had also substantial negative impact on the respective stock markets (Allegret and Sand-Zantman, 2009, Alvarez-Plata and Schrooten, 2004 and Camarero et al., 2006). The upward trend of capital flows to the emerging markets of Latin America and in the rest of the world was interrupted as a result of the of the credit and financial crisis that began in September 2007 in the U.S. with the collapse of the subprime mortgage market. Since the summer of 2008 the spread of the credit and financial crisis from the U.S. to Latin America and the rest of the world caused significant negative effects on the stock markets and the economies of these Latin American countries (LACs). More specifically, the 2007–2009 financial crisis which reached its peak in October 2008 led the over borrowed hedge funds, private equity and other institutional investors to withdraw from the emerging markets of Argentina, Brazil, Chile and Mexico among others. This liquidation of financial assets included heavy sales of stock, bonds as well as currencies in an attempt to reduce the enormous realized losses that investors had already suffered. This dramatic capital outflow from these LACs increased the risk of a significant currency devaluation which could led in turn to enormous corporate losses and even bankruptcy reducing the value of stocks traded in the respective markets and accrued to investors major capital losses. Furthermore, the flight to quality by foreign investors had also led to a significant deterioration of the balance of payments of the LACs. The economic and monetary integration of Southern Latin America has suffered another setback during the current crisis as well. This dramatic deterioration in the global financial markets has brought in the surface once again the strong linkage between stock prices and exchange rates and the possible causal relations that may exist between them. Alternative theories of exchange rate determination have for long documented the positive relationship between the stock market performance and the exchange rate changes. Thus, models of current account dynamics (Dornbusch & Fisher, 1980) show that movements in exchange rates have an impact in the international competitiveness and the position of the trade balance. As a result we expect a change in the output of the economy and finally a change the firms’ performance and their stock prices. However, it is also possible to track the reverse links, implying that changes in stock prices may also affect exchange rates. This is accomplished through the change in demand for money caused by economic agents’ wealth given that domestic stocks are part of their portfolio. This positive relationship has also been shown within the portfolio-balance models developed by Branson (1983) and Frankel (1983).1 In this paper, we investigate the existence of dynamic linkages between foreign exchange and stock markets in Argentina, Brazil, Chile and Mexico. These four Latin America economies are considered to be the major economies in the region and economic developments that take place domestically have substantial impact on the other countries of Latin America. However, although they share common features they also differ in terms of size of the economy, degree of development, rate of growth and maturity of financial markets. At the same time they all have strong economic and financial linkages with the U.S. and therefore their economies are affected by positive or negative developments in the U.S. economy. The motivation of this paper is driven by several reasons. First, although there has been a substantial literature which examines the relationship between foreign exchange and stock markets for several groups of industrialized countries there are only two recent studies Phylaktis and Ravazzolo (2005) and Pan, Fok, and Liu (2007) which however focus their analysis only to Southeast Asia emerging markets. Therefore, to the best of our knowledge the present study is the first to examine this issue for the Latin America region offering a further insight on this relationship. Second, unlike developed countries, these four LACs like most developing countries have not adopted a freely floating exchange rate system and imposed capital controls, the extreme case being Argentina which adopted dollarization in the last part of the 1990s. Therefore, it is important when we study the existence of the long-run relationship between the stock and foreign exchange markets to pay attention on the question whether financial liberalization that these economies have implemented in late 1980s and early 1990s has any significant effect on this link taking into consideration that these economies have not adopted a freely floating exchange rate and this may lead exchange rates to partially respond to price stock movements. Capital controls also may lead to a distortion of the link between the two markets. Third, we evaluate the potential effect that the 1994 Mexican crisis, the 1997–1998 Asian and Russian financial crisis as well as the 2007–2009 financial turmoil have on this relationship. Finally, we analyze the effect of U.S. stock market, used as a proxy of the world market has on the link between the domestic stock and foreign exchange markets and we also look into the causal patterns between these two markets and analyze how different causality directions may have an impact of the transmission channel of disturbances. The choice of the U.S. stock market is justified on the notion that the U.S. is a leader country and exerts a global influence. This choice is also motivated by the fact that as capital flows restrictions are lifted in the Latin America equity markets it is expected that the correlation between the local markets and the stock markets of other regions will rise and such a higher degree of correlation is expected to be exhibited in the link between the foreign exchange and stock markets. Thus it is evident that the results of the present analysis have important policy implications with respect to the appropriate monetary, exchange rate and capital controls policies that these emerging economies of Latin America should follow. Moreover, understanding the dynamic relationships between foreign and stock markets will also provide the multinational companies in the region with the necessary information to hedge against foreign exchange exposure. Our empirical results show that there is a long run relationship between the local stock market, the foreign exchange market and the U.S. stock market which implies the significant role of the latter as a transmission mechanism as well as the increasing degree of integration on global financial markets. We also find that the stability of the cointegrating relationships is affected during the Mexican currency crisis of 1994–1995, the Asian financial crisis of 1997 as well as during the 2007–2009 credit and financial crisis. Furthermore, the multivariate Granger causality test shows a significant causal relation from exchange rates to stock prices for Argentina and Brazil, whereas for the case of Mexico we detect a causal relation from stock prices to exchange rates. For the case of Chile we report a bi-directional causal relation. Finally, it is shown that financial liberalization has not been a key factor in the link between the local stock and foreign exchange markets or between the domestic and the U.S. stock market and that other factors such as access to market information may be considered to be important for foreign investment. The structure of the rest of the paper is as follows. Section 2 discusses the theoretical framework of the relationship between stock and foreign exchange markets. In Section 3 we present the econometric methodology applied. Section 4 presents the data and discusses the empirical results and in Section 5 we give our summary and concluding remarks.

This paper examined the long-run relationships and the short-run dynamics between stock and foreign exchange markets for Argentina, Brazil, Chile and Mexico using monthly data for the period January 1980–February 2009. There are several interesting findings stem from our analysis. First, we were unable to find a statistically significant cointegration vector in each Latin America country between the domestic stock market and its respective real exchange rate for either the 1980s or the 1990s. Second, when our VAR system was completed with the inclusion of the U.S. stock market which was taken as a proxy for the world equity markets our results were in favour of the existence of a statistically significant long-run relationship for the three variables in each case. This finding provides evidence that the U.S. stock market operates a transmission mechanism through which the domestic stock and foreign exchange markets are linked. In addition, for each emerging market the estimated coefficients of the real exchange rate and the U.S. stock market are positive suggesting a positive relationship with the respective domestic stock market. Moreover, with the use of the Hansen and Johansen (1993) recursive test for parameter constancy we showed that the identified long-run relationship is stable over time except for the case of Brazil whereas the estimated parameters for each economy exhibit instability during the period of the Mexican peso crisis but not during the Asian crisis. It also evident that around the Mexican peso crisis these linkages between the two markets were stronger confirming earlier studies on contagion effects but at the same time these events were short lived and since in mid 1995 the long-run relationships appeared to have regained its normal evolution. However, all cases exhibit instability characteristic since the end of 2007 and through the 2007–2009 financial crisis. Third, the results of the multivariate Granger causality tests indicate that the U.S. stock market drives the system of the four emerging economies which confirms the influence that the U.S. economy has on these Latin America economies. Furthermore, the causality results show that in Argentina and Brazil the link between the two markets is done through the “flow channel”, in Mexico through the “stock channel” and in Chile the markets are connected through both channels. Finally, our results indicate that financial liberalization has not been a key factor in the link either between the domestic stock and foreign exchange markets or between the domestic and the U.S. stock markets. Besides to free capital movement, access to market information is considered to be important for increasing foreign investment. The fact that Argentina, Brazil, Chile and Mexico have a substantial volume of trade with the U.S. may be a reason that independently of the degree of financial liberalization of these countries there is a significant degree of financial integration as well. The existence of interrelationships between the foreign exchange and domestic and foreign stock markets suggests that policy makers in these LACs should take it into consideration when they design their economic policy of higher degree of economic and monetary integration within the region. As it is also shown the current financial crisis has delayed such a monetary integration like the previous ones. Thus, the respective governments should take measures to complete the financial liberalization process as well as the monetary integration process. In addition given that during the financial crisis an increase in the links between stock and foreign exchange returns was recorded the policy makers as well as multinationals should take this evidence into consideration in order to ease the negative effects on the real economy as well as adopt appropriate hedging strategies against foreign exchange exposure.