Interest Rate Volatility and Contagion in Emerging Markets: Evidence from the 1990s

In this paper we use high frequency interest rate data for a group of Latin American countries to analyze the behavior of volatility through time. We are particularly interested in understanding whether periods of high volatility spillover across countries. Our analysis relies both on univariate and bivariate switching volatility models. Our results indicate that high-volatility episodes are, in general, short-lived, lasting from two to seven weeks. We find some weak evidence of volatility co-movements across countries. Overall, our results are not overly supportive of contagion' stories.

Volatility Dependence and Contagion in Emerging Equity Markets

In this paper we use weekly stock market data for a group of Latin American countries to analyze the behavior of volatility through time. We are particularly interested in understanding whether periods of high volatility are correlated across countries. The analysis uses both on univariate and bivariate switching volatility models. Our results do not rely on the correlation coefficients, but on the co-dependence of volatility regimes. The results indicate that high-volatility episodes are, in general, short-lived, lasting from two to twelve weeks. We find strong evidence of volatility co-movements across countries, especially among the Mercosur countries.

Impact of Capital Controls and Transaction Costs on the Return Distribution of Dually Traded Securities: Evidence from Chile and Argentina

In this paper we compare the distributions of ADR returns and the returns of the locally traded shares between Chile and Argentina. This comparison is interesting because both countries are emerging economies with a similar free market orientation. Both countries have similar free market orientation, but they differ in two important respects: (1) exchange rate regime and (2) restrictions to foreign investments. We find several differences between the two economies. Consistent with previous research, we find that the volatility of ADR returns tends to be higher than the return volatility of the underlying securities. We also find that the return distributions of Chilean ADRs are significantly different from the distributions of the returns on the respective underlying Chilean shares. The results reveal that while the mean returns are the same, the return standard deviations are significantly different. In contrast, Argentinean ADRs and their respective underlying shares tend to have the same distribution of returns. Finally, we employ a threshold model to estimate the transaction cost of trading the ADRs and the locally traded shares. We find that transaction costs that must be added to the returns difference before arbitrage is possible are between 1% and 2% for Chilean ADRs, and slightly lower - 0.66% to 1.65% for Argentinean ADRs. We also find that the daily return differential reversion caused by arbitrage activities is around 30% for Chilean ADRs and 40% for Argentinean ADRs.

Extreme observations and diversification in Latin American emerging equity markets

In this paper, we focus on the tails of the unconditional distribution of latin American emerging markets stock returns. We explore their implications for portfolio diversification according to the safety first principle, first proposed by Roy (1952). We find that the Latin American emerging markets have significantly fatter tails than industrial markets, especially, the lower tail of the distribution. We consider the implication of the safety first principle for a U.S. investor who creates a diversified portfolio using Latin America stock markets. We find that a U.S. investor gains by adding Latin American equity markets to her purely domestic portfolio. For different parameter specifications, we find a more realistic asset allocation than the one suggested by the literature based on the traditional meanvariance framework. JEL: C53, G15 The well documented high average stock returns and their low correlations with industrial market