Are Latin American stock markets connected? Exploring spillovers and the impact of risk factors

Abstract

This paper studies the connectedness among equity markets in Latin America (Argentina, Brazil, Chile, Colombia, Mexico, and Peru) and the effects of fundamental risk factors on the degree of their connectedness. Both time-varying parameters VAR (TVP-VAR) and quantile VAR (Q-VAR) models are used. Based on daily returns covering the period from February 02, 2016, until May 08, 2023, we find evidence of a low level of total connectedness, which is widely intensified in extreme conditions. Each market substantially contributes to its variation and contributes or receives a mild effect from each element in the system. Moreover, we show that the dynamic spillover effects between Latin American stock markets are driven by different uncertainty measures and are mainly affected by the COVID-19 outbreak and the Russian-Ukraine conflict. Our findings are beneficial to investors aiming at optimizing hedging strategies as well as to policymakers in the appropriate policies to manage equity market sensitivity.