Mexico's Integration into the North American Capital Market
Coauthor(s): Rong Qi.
We explore a model of time varying regional market integration that includes three factors
for the North American equity market, the local Mexican equity market and the pesoydollar
exchange rate. We argue that a useful instrument for the degree of integration is the sovereign
yield spread. Applying our methodology to Mexico over the 1991–2002 period, we show
that the degree of market integration was higher at the end of the period than at the beginning
but that it exhibited wide swings that were related to both global as well as local events. We
also discover that Mexico's currency risk is priced. Further, the currency returns process
reveals strongly significant asymmetric volatility that is strongly related to the asymmetric
volatility of the Mexican equity market returns process. A plausible reason for these results
is that currency devaluations in emerging markets like Mexico can cause default-risk crises
in local banking systems that mismatch local-currency assets and hard currency liabilities,
whereas appreciations produce no such problems. Devaluations that destabilize banking
systems are, therefore, more likely than appreciations to increase the volatilities of both the
currency's and the equity market's returns.
Source: Emerging Markets Review
Qi, Rong, and Michael Adler. "Mexico's Integration into the North American Capital Market." Emerging Markets Review 4 (2003): 91-120.