Excess Returns and Systemic Risk for Chile and Mexico

Abstract

This paper is concerned with excess returns in the equity markets and the evolution of systemic risk in Chile and Mexico during the years 1989-1998, a period of financial openness, policy reform and crisis. A time varying generalised autoregressive conditional heteroscedastic in mean framework is used to estimate progressively more complex models of risk. They include the univariate own volatily model, the bivariate market pricing model, and the trivariate intertemporal asset pricing model. The results show no evidence of a significant reduction in systemic risk rather excess returns have remained volatile for both countries. For Chile, excess returns are significantly related to own lagged levels, while for Mexico excess are significantly related to own lagged variances. The influence of global factors are relatively minimal compared to potential home factors.