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Macroeconomic Shocks and the Co-movement of Stock Returns in Latin America
Código: WPE – 120
This paper studies the economic sources underlying the co-movement of real stock returns in Latin America. Following the literature on Structural Vector Autoregressive Models (SVARs) using long-run restrictions, three structural shocks are identified: demand, supply and portfolio shocks. First, I document the pervasive co-movement of real stock returns in Latin America by means of simple correlations. Second, for each country, I asses the importance of each structural shock in explaining real stock return dynamics. Third, I identify which shocks are driving the observed co-movement in Latin American real stock returns. Results show that, for the majority of countries, portfolio shocks are the main driving force behind real stock returns. Furthermore, that shock is also extremely important in explaining co-movement patterns in Latin American stock markets. In addition, macroeconomic shocks (supply and demand) are unimportant and weakly correlated across countries, suggesting financial integration without economic integration in Latin America.