CEPII, Recherche et Expertise sur l'economie mondiale
The Effects of the Subprime Crisis on the Latin American Financial Markets: an Empirical Assessment

Gilles Dufrénot
Valérie Mignon
Anne Péguin-Feissolle

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 Abstract :
The aim of this article is to answer the following question: can the considerable rise in the volatility of the LAC stock markets in the aftermath of the 2007/2008 crisis be explained by the worsening financial environment in the US markets? To this end, we rely on a timevarying transition probability Markov-switching model, in which “crisis” and “non-crisis” periods are identified endogenously. Using daily data from January 2004 to April 2009, our findings do not validate the “financial decoupling” hypothesis since we show that the financial stress in the US markets is transmitted to the LAC’s stock market volatility, especially in Mexico.

 Keywords : Stock markets | Volatility | Financial stress | Regime-switching | Markov-switching model

 JEL : C13, C22, G01, G15
CEPII Working Paper
N°2010-11, July 2010

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