Do Equity Markets in the Major Latin American Economies Follow a Random Walk?

Chu V. Nguyen

Abstract


This study applies Lo and MacKinlay’s methodology on the weekly movements of equity indices in Argentina, Brazil, Chile, Colombia, Mexico and Peru over the early years of the twenty first century in the WTO and NAFTA era.    To test for the robustness of the model, the US S&P 500 equity index was also included in the analysis.  The empirical findings indicate that among equity markets in Latin American countries, only Chilean and Peruvian stock markets are weak-form efficient while the equity markets in other economies are not. The empirical findings suggest investors and traders can use past information to predict prices or returns on market portfolios in the future only in Brazil while they can include equities from Argentina and Chile for international portfolio diversification.  As to investment strategies for investing in Colombia, Mexico, and Peru,  investors and traders, as the investment horizon lengthens, should invest more (less) in stocks if the relative risk aversion is less(greater) than unity than if returns were to follow a random walk.

Keywords: Argentina; Brazil, Chile; Colombia; Mexico; Peru, the US, Equity Index; Lo and McKinley’s methodology; random walk.


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