Portal Red Investigadores de Economía

Do stock markets reflect changes to macroeconomic fundamentals? According to the semi-strong form of the Efficient Market Hypothesis (EMH, Fama, 1970), stock prices should react immediately to the surprise content in macroeconomic announcements, without any predictable over or under reaction. We tested this in the six of the main Latin-American equity markets: Argentina, Brazil, Chile, Colombia, México, and Peru, for the announcements of Consumer Price Inflation, Central Bank interest rate, GDP growth, Trade Balance and Unemployment rate. Following Flannery and Protopapadakis (2002), we estimate the effect of the surprises of such announcements using time series models of conditional volatility, exchange rate control, and international stock markets. We found that the effects on the market returns are significant and with the expected sign only for announcements of the CPI in Mexico, for the interest rate in Chile and Colombia, and for Unemployment in those three markets. In some cases the stock markets incorporate the announcement with a lag, whereas in others, and in opposition to EMH, they react to the announcement rather than to the surprise content. We conclude that the Latin-American stock markets react only partially to the macroeconomic announcements and do not fully incorporate the new information efficiently.

Macroeconomic News and the Stock Market: The Case of Latin America