Linkages among Latin American foreign exchange markets: a long-run perspective in the presence of structural breaks

Abstract

This article examines stationarity properties, linkages and market efficiency of the Latin American foreign exchange markets over the 1994 to 2005 period. By using daily data for 14 countries we apply bivariate and multivariate cointegration estimations and we further account for the presence of structural breaks or changes in regime. Bivariate cointegration tests revealed that most currencies have a long-run equilibrium relationship with the Brazilian real. Moreover, approximately between 1999 and 2001, there was a shift to a new ‘long-run’ equilibrium relationship.

Acknowledgements

An earlier draft of this article was presented at the 70th Annual Meeting of the Midwest Economic Association in Chicago, Illinois. I am grateful to Ana Maria Herrera, Susan Pozo, Carlos Vargas-Silva and Mark Wheeler for helpful comments.

Notes

¹ Some papers have addressed the issue of cointegration among stock markets in Latin America. Some examples are Choudry (1997), Seabra (2001) and Fernandez-Serrano and Sosvilla-Rivero (2003).

² Data from Bolivia, Costa Rica, Nicaragua and the Dominican Republic come from their own central banks. Daily data corresponds to five days a week (weekends excluded).

³ Argentina is omitted from the 1994 to 2000 period since its currency was pegged to the US dollar for most of this period.

⁴ This has been the result of these countries' movements towards inflation targeting programs (Edwards, 2002; Fisher, 2001). Edwards (2002) argues that even though there is a ‘fear of floating', these countries do behave like floaters.