Stock markets and their relationship

with the real economy in Latin America

with the real economy in Latin America

Stock Market Activity and Development in Latin America

*Unit Roots Analysis*

To analyze the difference between two or more variables, it is important to establish if the stochastic processes that generate the time series are variable in time, i.e. if the processes are stationary (Eq. 1). They should not have unit roots and should be on the order of I (0). The series with an order of I(d) > 0 have at least one unit root. The test most frequently applied in financial economics to determine the presence or absence of unit roots is the Augmented Dickey-Fuller test along with the critical value of McKinnon (1996) (one-sided p-values). Table 1 shows the results of this test for GDP in Argentina, Brazil, Chile and Mexico in levels and with first differences. The tests are reported with tendency and intercept.

The Latin American stock market series in levels generally show unit roots, as confirmed by Brugger (2010). The GDP and stock market series in levels are analyzed in this study. The unit root tests for the first differences are shown in Tables 1 and 2. Table I shows that the series for GDP growth for countries shown is stationary. In each case the rejection of the null hypothesis is strong. The t statistic obtained exceeds all the critical values, indicating that there is no unit root to 1%. The one-sided p-values of MacKinnon confirm this result: in all cases it is less than 0.05%.