U.S. and Latin American stock market linkages Abdelmounaim Lahrech a , Kevin Sylwester b, * a School of Business and Administration, Al Akhawayn University, Morocco b Department of Economics, So. Illinois University-Carbondale, MC 4515, SIU, Carbondale, IL 62901, USA Keywords: Latin American stock markets Dynamic conditional correlation Smooth transition abstract This paper examines to what extent the Latin American equity markets of Argentina, Brazil, Chile and Mexico have become more integrated with the US equity market. We empirically measure integration by finding the dynamic conditional correlation (DCC) between each market and that in the U.S. using a DCC multivariate GARCH model. We then track how these correlations evolve over time using a smooth transition model which not only shows when greater integration first occurred but also how long it took these correlations to transition to their new levels. Our sample period stretches from December 30th, 1988 to March 26th, 2004. Results show an increase in the degree of co-movement between these countries’ equity returns and those in the U.S. although the magnitude and speed of these increases greatly varies across these four countries. Ó 2011 Elsevier Ltd. All rights reserved. 1. Introduction Have the U.S. and Latin American equity markets shown greater co-movement over time? If so, when did the change occur and how long was the transition period from the old degree of co- movement to the new one? Answers to these questions are of a great importance for investors and policy makers. 1 For investors, the design of a well-diversified portfolio requires a clear understanding of how international stock returns are correlated and how these correlations change over time. Policy makers are concerned about correlations among equity returns and how these correlations evolve over * Corresponding author. Tel.: þ1 618 453 5075. E-mail address: ksylwest@siu.edu (K. Sylwester). 1 We discuss co-movement and not integration because the focus of this paper is on how correlations between equity markets have evolved over time. Although this is an important component as to whether or not markets are integrated, it is not the only one. Contents lists available at ScienceDirect Journal of International Money and Finance journal homepage: www.elsevier.com/locate/jimf 0261-5606/$ – see front matter Ó 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.jimonfin.2011.07.004 Journal of International Money and Finance 30 (2011) 1341–1357