Long-Run Inflation and Exchange Rates Hedge of Stocks in Brazil and Mexico

Abstract

A substantial body of evidence documents the relationship between macroeconomic variables and stock returns and risk from developed countries. The evidence for emerging markets is limited, particularly identifying risk premia compensations for inflation and exchange rates. This paper attempts to quantify the short and long term relationship between inflation and exchange rates with over all stock market performance for the case of the two largest Latin American capital markets, Mexico and Brazil. Extending the Fisher model, the aim is to determine whether or not these markets have failed to keep pace with movements in those two variables (the most unstable and economic growth hampering variables in these economies during the last three decades), and therefore to what extent the stock market succeeds or fails to test as inflation hedges. The empirical evidence is presented assuming positioning of a local investor in their own market, and from the point of view of a U.S. investor in each of these markets. Two unit root tests are also presented to stress long term relationships between stock returns, inflation, and foreign exchange.

Do Domestic Sentiment and the Spillover of US Investor Sentiment Impact Mexican Stock Market Returns?

“…Furthermore, the peso/US dollar exchange rate has a significant impact on investor sentiment and stock market returns, indicating that the exchange rate should be taken into account when studying sentiment and returns. These findings are consistent with Ortiz et al (2006) and Trevino (2011) who document exchange rates as a significant factor in modelling Mexican stock returns. Moreover, we find that US sentiment spills over to Mexico, thus influencing both Mexican sentiment and stock market returns.…”

“…Ortiz et al (2006) and Trevino (2011) highlight the significant relationship between exchange rate fluctuations and Mexican stock market returns. Therefore, we add the peso/US dollar exchange rate to our empirical specification and test whether exchange rates influence Mexican sentiment and stock market returns.…”

“…This could indicate that as the peso gains value (relative to the dollar), Mexican investors become more optimistic. Various studies highlight the importance of the exchange rate in Mexico’s economy and its correlation with stock market returns (Ortiz et al, 2006; Tovar-Silos, 2012; Trevino, 2011). Notice that the exchange rate is also significantly correlated with Mexican stock market returns (−0.40), suggesting that there is an important relation between the Mexican peso and the Mexican stock market.…”

“…The vast majority of empirical research for the Mexican stock market ignores the role of investor sentiment (Curci, Grieb, & Reyes, 2003; Diamandis, 2008; Herrera & Lockwood, 1994; Lopez-Herrera & Ortiz, 2011; Lopez-Herrera, Ortiz, & de Jesus, 2012; Ortiz, Cabello, & de Jesús, 2006; Roden, Lizola-Margolis, & Salgado, 2012). To our knowledge, only Perez-Liston and Huerta (2012) take into account the influence of Mexican sentiment on Mexican stock market returns.…”

Investigating Equilibrium Relationship between Macroeconomic Variables and Malaysian Stock Market Index through Bounds Tests Approach

“…However, during the last three decades, many emerging countries followed financial and economic liberalization by opening their economies and domestic stock markets to international investors that leaded to enhance economic growth (Ortiz et al, 2006). In 1991, the economic and financial plan was coincided with the financial and economic liberalization.…”