Can Economic Policy Uncertainty in the United States Predict the Performance of Stock Markets in South America?

Abstract

This paper investigates if the changes in economic policy uncertainty in the United States can predict the performance of stock markets in South America (Argentina, Brazil, Chile, and Colombia, Peru, and Venezuela). Based on the analyses of monthly returns of the Buenos Aires SE Merval Index from 1988:4 to 2012:5 and Colombia IGBC General Index, Brazil Bolsa de Valores de Sao Paulo Index, Santiago SE IPSA Index from 1985:2 to 2012:5, Venezuela Stock Return Index from 1988:1 to 2007:12, and Peru Stock Return Index from 1993:1 to 2012:12, the results show that the increase in the changes of economic policy uncertainty in the US negatively predict stock market performance in Chile, Colombia, Peru. Although the performance of stock markets in Brazil and Argentina are negatively affected by the changes in economic policy uncertainty in the US, the effect is not statistically significant. The performance of stock market in Venezuela positively responds to the changes in economic policy uncertainty in the US; this response is not statistically significant. The findings suggest a mixture of reactions of the stock markets in South America to the economic policy uncertainty in the US.

Keywords: economic policy uncertainty, stock return performance, USA, South America

JEL Classification: E60, G12, G14