Effects of MILA on their stock markets: an empirical analysis on market activity and dynamic correlations

Abstract

Purpose

The purpose of this article is to analyze the effects of the integration process for the Integrated Market of Latin America (MILA) on its stock markets behavior as well as their degree of integration.

Design/methodology/approach

Daily time series data were used for stock returns, volatility, volume and the number of transactions and securities between August 16, 2007 and December 28, 2018. A DCC-MGARCH model was applied to analyze the impact of MILA on stock market behavior and predict dynamic correlations. A GARCH (1,1) model was used to determine the effect of MILA on co-movements between markets. Finally, a Markov regime switching model was used for robustness analysis.

Findings

MILA increased stock market activity in terms of volume, transactions and securities traded. However, it reduced returns and volatility. MILA had significant effects on the dynamic correlations between regional stock markets. After the integration process, the dynamic correlations of returns and volatility were reduced, but those related to volume, transactions and securities traded increased. Mexico's subsequent entry into MILA further reduced market volatility, but it did not have relevant effects on markets' co-movements.

Originality/value

These results are relevant for investors and policymakers. MILA has benefited the markets by promoting stock market activity, reducing risk, creating a margin for diversification and limiting risk contagion between them. These results help to guide investment decisions due to the fact that MILA's benefits in terms of regional diversification would be greater in some markets.

Citation

Muñoz Mendoza, J.A., Sepúlveda Yelpo, S.M., Velosos Ramos, C.L. and Delgado Fuentealba, C.L. (2022), "Effects of MILA on their stock markets: an empirical analysis on market activity and dynamic correlations", International Journal of Emerging Markets, Vol. 17 No. 2, pp. 574-599. https://doi.org/10.1108/IJOEM-12-2019-1070