Volume 43, Number 168,
January-March 2012
Stock Markets and their Relationship
with the Real Economy in Latin America
Samuel Brugger and Edgar Ortiz
Error Correction Model Analysis (ecm)

In long term estimate analysis, there are moments of imbalance, owing to the random nature and complexity of finances, short term deviations according to the short term relationships. To determine the extent and duration of these imbalances, error correction model analysis is used (ecm). This enables the analysis of long term balance to be linked with short term adjustment dynamics, as a measure of balance deviation (Eq. 5 and 6).

Table 4 shows the results obtained. The error term is low, indicating the short and long term discrepancies are small. In the case of Argentina, the error coefficient indicates that around 2.1% of the negative discrepancy is reduced month by month; there is a 4.7% adjustment for Brazil; a less than 1% adjustment for Chile and around 3% adjustment for Mexico. With the exception of Chile, all the countries show a similar error margin. The coefficient is significant for the four countries at 1%. All show a high R2; the Durbin-Watson statistics of all the regressions are slightly more than 1.96, which indicates a lack of self-correlation of the residues.

Granger Causality Modeling

Granger Causality Modeling (1969) seeks to determine statistically if the past of the x variable contains information preceding the behavior of the y variable, and therefore if it contributes to explaining it and vice versa. It is important to clarify that Granger Causality Modeling is highly sensitive to the number of lags. In this current study it was found that for the four countries, the optimal number was up to 11 lags; 12 lags are not optimal owing to the December effect in the four emerging markets in Latin America (Brugger, 2009); this anomaly creates high peaks in the residues and statistically it is not viable to include them in self-regression analysis. The results are summarized in Table 5: the F statistic is shown and its probability in parentheses. The hypothesis that is tested confirms that both the Y over X regression coefficients as well as X over Y are null for the support variable; that is, that the X variable does not provide information to explain Y, or rather that Y does not provide information to explain X. If the value of the F statistic exceeds the tabulated value, the null hypothesis is rejected, and therefore it can be accepted that X causes Y and vice versa.

The Granger Causality Analysis shown in Table 5 is unidirectional: from the stock market index to monthly gdp, i.e. no causality was found in the opposite direction. This means that the stock exchange influences economic development but economic development does not influence the performance of the stock exchange. This result suggests that stock exchange activity in emerging stock markets in Latin America follows its own cycles, which are not in line with the real economy: they are not based on the economy's past information, but rather stock market trends, on the very expectations of the stock market, as well as speculation. A plausible explanation for this unilaterality could be the importance of past stock market information in emerging markets and a lack of sufficient information on the fundamentals of the economy.

Finally, the results of the Ranger Causality Analysis are also shown in Table 5 using the series in local currency, a test undertaken to determine if the exchange rate affects the results. The results were not found to be different. The unidirectionality of the stock exchange-market relationship confirms that the evidence presented is similar to the results obtained in studies by Christopoulos and Tsionas (2003), Hassapis and Kalyvitis (2002), Howells and Soliman (2003; 2005) and Nasseh and Strauss (2000). For their part, this result rejects those obtained by Apergis, Filippidis and Economidou (2007), Tuncer and Alovsat (2000) and et al. (2007c), in which a bidirectionality exists, as for Fama (1990), who argues that the relationship is quite to the contrary.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 193, April-June 2018 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: Moritz Cruz. 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: June 27th, 2018.
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