Volatility and dependence structures of Latin American stock markets

Abstract

Purpose

Risk management has been crucial to investors and regulators for pursuing market diversification opportunities and developing strategies to ensure market stability. This study examines the dependence structures of volatility, related to co-movements and macroeconomic effects, among Latin American stock markets and the risk–return spectrum benefits in the Latin American market using time-varying returns and volatility forecasts within a multivariate structure.

Design/methodology/approach

The sample comprised the largest stock markets in Latin America during the period from January 2000 to December 2017 and copulas and multivariate models were applied.

Findings

The results indicated that the copula with the best fit for modeling the dependence structure of the markets was symmetric Joe-Clayton with time-varying parameters. The dependence volatility structure was higher in the positive (upper tail) than in the negative (lower tail) returns, which may indicate that the Latin American markets had diversification benefits during downturns. Evidence of market coupling was found during times of the global crisis (subprime crisis) in Latin America. The presence of monetary and temporal effects over the dependence structures suggests that investors may obtain gains in a multivariate structure with copula distributions.

Originality/value

The findings will be of interest to researchers and practitioners for several reasons. First, this study contributes to the growing literature on the relationship between market dependence and volatility. Second, it indicates that the Latin American markets may present diversification advantages during downturns. Third, it informs the influence of macroeconomic effects on Latin American markets. The models that included the nonnormal and asymmetric characteristics of the financial market yielded better results in terms of less information loss and data adherence.

Citation

Cardoso, G., Ribeiro, K. and Carvalho, L. (2021), "Volatility and dependence structures of Latin American stock markets", Managerial Finance, Vol. 47 No. 4, pp. 441-465. https://doi.org/10.1108/MF-02-2020-0051