Stock market risk and dollarization in Ecuador

Abstract

We study the impact of dollarization and related economic liberalization of Ecuador in January 2000 on the distribution of stock returns in Ecuador. While the mean dollar return of investing in Ecuadorian stocks changed from large and negative to large and positive, traditional measures of volatility such as the SD of returns actually increased after dollarization. However, focusing on the tails of the distribution and extreme events, we find that the tail thickness of the distribution of Ecuador stock returns increased for positive returns but decreased for negative returns. Thus, while the SD may have increased, it is because of a greater probability of large positive returns. The probability of large negative returns decreased post dollarization. Value at Risk estimates illustrates this phenomenon.

The Long Term Impact of Deposit Dollarization on Stock Markets in Mist Economies

“…Our analysis result in line with the theory and literature. Our empirical analysis results are compatible with the studies of Jansen and Ortiz (2007), Balima (2017), Kaya and Açdoyuran (2019) and Işık and Yüncü (2022). This demonstrates the robustness of present study.…”

“…Examining the studies based on dollarization reveals that there is a limited number of studies examining the effect of financial and deposit dollarization on stock market indices (some examples are, Jansen and Ortiz (2007), Ben (2016), Balima (2017), Kaya and Açdoyuran (2019)). Conversely, numerous studies have explored the connection between dollarization and exchange rates, some of them are Sever (2012), Udoh and Udeajaa (2019) while, the studies of Bahmani-Oskooee and Domaç (2003), Neanidis and Savva (2009) examine the relations between dollarization and various macroeconomic variables.…”

“…Finally, it's worth noting that the interaction between dollarization and stock market performance has been the subject of examination in a relatively restricted number of studies, and a summary of some of these studies is presented below. Jansen and Ortiz (2007) examined the impact of dollarization on stock returns. They used daily data from the Equatorial stock exchange between 3 August 1993 and 5 March 2006.…”