Stock markets and their relationship
with the real economy in Latin America
Samuel Brugger *and Edgar Ortiz **
EMPIRICAL RESULTS
Stock Market Performance and Growth in Emerging Markets in LA

Prior to rigorous econometric analysis, it is useful to examine changing patterns in the real economy and stock markets of the countries under study. Both GDP and the stock market sector in Argentina, Brazil, Chile and Mexico experienced irregular, heterogeneous growth on a regional level. Figure 1 summarizes the performance of GDP in the four countries under study. As can be observed, with the exception of Chile, none of the countries experienced continuous growth during the period under study. Particularly striking are the recurrent cycles of boom and bust in Argentina, Brazil and Mexico but with marked differences in volatility. Equally prominent are the economic crises of the Mexican economy from 1994 to 1995, the Brazilian crisis of 1998 to 1999 and the collapse of the Argentine economy from 2001-2002.

An initial study of the relationship between the stock markets, represented by their stock indices measured in dollars, and their respective GDPs, also measured in dollars, is summarized in Figure 2. It is difficult to identify a relationship between these variables. In neither instance is any relationship discernible, except in the case of Chile, where there is a slight trend towards growth. However, this is not a definitive test. As described in the econometric modeling, this relationship should be measured using the first differences in the time series, which is discussed in a later section.

Figure 1. Monthly GDP Growth Rates of Major Latin American Economies (1993=100)
Source: Prepared by the authors on the basis of data supplied by CEPALStat (Latin American and Caribbean Statistics).


Figure 2. GDP-Stock Market Indices in Latin America
Source: Prepared by the authors on the basis of data supplied by CEPALStat (Latin American and Caribbean Statistics).