Vaneesha Boney1, Hany S. Guirguis2, Marcelo Moura3

(1. Finance Department, Daniels College of Business, University of Denver, USA;

2. Department of Economics and Finance, Business School, Manhattan College, USA;

3. Insper Institute of Education and Research, Brazil)

 

 

Abstract: This paper examines the transmission mechanisms of short- and long-term price spillovers between the US and Brazilian equity markets. For the short-term relationship, we use a bivariate Generalized Autoregressive Conditionally Heteroskedastic model to test for the lead-and-lag relationship between the two markets. For the long-term relationship, we use Gonzalo and Granger’s (1995) price discovery methodology. Tests are run over the sample period from January 2000 to December 2012, and for three sub-periods: January 2000 to November 2007 (before the financial crisis), December 2007 to June 2009 (during the crisis) and July 2009 to December 2012 (after the crisis). We find strong evidence of a positive unidirectional price spillover from the US to the Brazilian equity market. This spillover effect exists in both the short and long term for the period after the financial crisis (2009-2012). These findings may indicate a weaker diversification benefit from including Brazilian equities in a domestic (US) portfolio, as well as the potential for profitable trading strategies that exploit the lead-lag relationship between these two markets.

 

 

Key words: international equity; spillover effects; emerging markets

 

JEL codes: E3, E1, O1