Volume 43, Number 168,
January-March 2012
Stock Markets and their Relationship
with the Real Economy in Latin America
Samuel Brugger *and Edgar Ortiz **
Date submitted: February 10, 2011. Date accepted: September 24, 2011


This paper examines the relationship between Latin American stock markets’ performance and their real economies, applying seven econometric models for Argentina, Brazil, Chile and Mexico. The relationship between stock market yields in these countries and their respective gdps is examined and compared, applying to each country's series, unit root tests, cointegration analysis, error correction model analysis, Granger causality modeling, self-regression vector analysis, impulse-response functions, and variance decomposition analysis. The series comprise the following stock markets: Argentina's merval, Brazil's bovespa, Chile's igpa, and Mexico's ipc, as compiled by Economática. The gdp series were obtained from the cepalStat database. The series are monthly and are for the period 1993-2005.

Keywords: Emerging capital markets, economic development, Latin America.

The financial liberalization and deregulation policies implemented in recent decades have resulted in increased stock market activity in the global economy. Numerous studies have tried to determine the role of stock markets in economic development. However, these studies have mainly addressed developed countries, yielding mixed results. This paper contributes further to this debate by examining the long term relationship between stock market activity and economic growth in Latin America (LA) using Argentina, Brazil, Chile and Mexico as representative case studies.


Since the pioneering studies of Gurley and Shaw (1955, 1960), Goldsmith (1969), Shaw (1973) and McKinnon (1973), important studies on finance and development have, for decades, outlined a positive relationship between the financial sector and economic development. The positive relationship between stock markets and economic development has been highlighted of late in financial literature due to the increasing importance of these markets in economic and financial globalization in recent decades. It is suggested that stock markets promote saving and that the resulting liquidity helps to ease the credit constraints prevalent in the banking sector in emerging economies. Demirgut-Kunt and Levine (1996) maintain that liquidity from stock markets increases capital productivity in the economy on a global level and facilitates profitable investments long term. Levine (1997) and Mishkin (2001) believe that a well-developed banking system including capital markets promotes investment thanks to better identification and financing of lucrative business opportunities, the mobilization of savings, efficient resource designation, the diversification of risk and support for the exchange of goods and services. Having reviewed the relevant literature, Enisan and Olufisayo (2009) document various means by which the development of stock markets contributes to economic development. Enisan and Olufisayo identify five mechanisms: (1) improved efficiency in the designation of capital as a proportion of financial savings given that total wealth increases; (2) the mobilization of savings to offer more attractive instruments and vehicles for savings; (3) the provision of instruments for negotiating, combining and diversifying risk; (4) reducing acquisition costs and processing information to improve the designation of resources, and (5) increasing productive specialization, developing entrepreneurship and acquiring new technology.

However, many points contradict the principals of traditional finance. Stiglitz (1985) and Capasso (2004) maintain that developed capital markets can become inefficient means of acquiring information for making investment decisions, both real and portfolio owing to the nature of public information, which makes good and bad news available in the markets. In the case of emerging stock markets, the lack of information can lead to ambiguous decisions on the part of both investors and business people. Furthermore, in both markets, the presence of asymmetric information deters investment; policies on interest rates and exchange rates prove ineffective in that banking and corporate decisions are suboptimal because the decision makers cannot distinguish between good and bad debtors. Under these circumstances the bank and companies face restrictive credit policies such as credit rationing and quantitative restrictions imposed by debt market investors and shareholders (Stiglitz and Weiss, 1981). Similarly, Singh (1997) and Singh and Weiss (1998) note that financial development can prove unfavorable to economic development, highlighting three examples: firstly the inherent volatility and arbitrariness of pricing processes in emerging stock markets, making them inadequate for allocating investment resources; secondly, the link between the stock and currency markets can exacerbate economic instability and reduce growth long term when unfavorable surprises take place; finally the development of capital markets can debilitate the strong relationships traditionally forged between the bank and companies in developing countries leading to significant limitations in real investment.

* Professor at the Faculty of Economics, UNAM and Researcher at the Mexican Institute of Environmental Governance (imgm), A.C. Email: bruggers@economia.unam.mx

** Titular Professor "C" at the Postgraduate Division of the Faculty of Political and Social Sciences, unam, Member sni iii. Email: edgaro@unam.mx

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Nov 13th, 2017.
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