The emergence, integration and future evolution of Latin American equity markets: 1990-2000

Why have emerging equity markets grown so rapidly since 1990? This thesis examines the link between the integration of emerging equity markets and the expansion of these markets in Latin America. The first chapter provides a model for how foreign equity investment through international listings can transform a local equity market from an equilibrium of low liquidity and market capitalization to a market with high liquidity and self-sustaining growth of actively traded equity. The option of international listing alters the incentives of local companies by improving liquidity, reducing the covariance risk and enhancing the provision of information on these companies, thereby lowering the cost of capital and increasing the number of companies listed in domestic and foreign markets. Welfare unambiguously improves from the perspective of the firm and the investor.;The empirical implications of the model are investigated in the next three chapters. The second and third chapters demonstrate the validity of the claim that prices of equities increase, returns become more integrated and overall volatility declines while volatility due to international factors increases. The integration of Latin American equity markets is tested before and after the liberalization of foreign investment restrictions with conditional and unconditional versions of the International Capital Asset Pricing Model (ICAPM). The explanatory power of the model is found to increase significantly after liberalization in Argentina and Brazil. Contemporaneous volatility spillovers from the United States to Argentina are found to increase after liberalization using various GARCH models. The impact is larger for negative innovations in the U.S. for Argentina and Mexico after liberalization.;The fourth chapter examines the claim that liquidity improves, information provided increases and more equity is issued in the domestic and international capital markets. For Mexican equities which have raised money in the United States with ADR programs between 1991 and 1994, trading volume increased significantly. The depth of Mexican equities trading in the domestic market also increased after liberalization. The issuance of equity in both the domestic and international capital markets expanded substantially during the period after liberalization.