Analysis shows volatility transmission and correlation changes in Latin American and US stock markets, highlighting investment strategies and hedging opportunities post-COVID-19.
Purpose This paper analyzes conditional correlations and volatility transmission between Latin American and US stock markets during the pre- and post-COVID-19 periods. Design/methodology/approach The study employs a range of econometric techniques, including six-dimensional BEKK-GARCH models and the Dynamic Conditional Correlation (DCC) model, to examine market interdependencies through spillover effects–specifically mean-to-mean, volatility-to-mean and volatility-to-volatility transmissions. It also conducts hedge ratio and optimal portfolio analyses to develop informed investment strategies. Findings The results reveal that while correlations between the markets are generally positive, they are moderate in strength and become more pronounced after the onset of the pandemic. Volatility transmission is particularly strong between the USA and Brazilian markets. Mexico, exhibiting lower correlations, presents opportunities for cost-effective hedging. In contrast, the Argentine market's high volatility reduces its suitability for inclusion in optimal portfolios. Originality/value This study offers a novel contribution by integrating BEKK and DCC models with hedging and portfolio optimization frameworks, enhancing the understanding of spillovers and conditional correlations among Latin American and US equity markets. The research highlights the rise in market correlations following the COVID-19 crisis, suggesting reduced market decoupling during periods of global stress. It also considers the political and economic implications of these dynamics, including the influence of US Federal Reserve interest rate movements on conditional correlations across countries.
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Passos et al. (2025) studied this question.
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