Theses and Dissertations - UTB/UTPA

Date of Award


Document Type


Degree Name

Doctor of Philosophy (PhD)


International Business

First Advisor

Dr. Jose A. Pagan

Second Advisor

Dr. Servando Hinojosa

Third Advisor

Dr. Evelyn Hume


There has been an increasing interest in studying the cross sectional relationship between systematic risk (as measured by beta) and return due to the inability of unconditional models to explain this relationship and the empirical contradictions found for the Sharpe-Lintner-Black CAPM model. Extant research on developed stock markets shows a significant relationship between beta and return when it is conditional to up and down markets. However, whether these results apply to Latin American equity markets is an issue that has not been previously studied.

With this in mind, this dissertation pursues two main objectives: (1) to analyze whether unconditional or conditional CAPM models are better explanatory frameworks in explaining the cross-sectional relationship between systematic risk and return across a selected group of Latin American stock markets, namely Argentina, Brazil, Chile and Mexico, and (2) to study the degree of integration across these markets. Econometric techniques such as pooled OLS in conjunction with GARCH models are employed to achieve the objectives.

The results from this study suggest that conditional CAPM models dominate unconditional approaches in explaining the cross-sectional portfolio return variations across the selected Latin American stock markets. Moreover, the results are consistent under different specifications, currencies, subperiods and after controlling for additional risk factors such as portfolio size, leverage, book to market value equity ratio, price-earnings per share ratio and a January effect. The findings also show the presence of statistically significant asymmetries in the price of risk for the Brazilian and Argentinean stock markets. These results are consistent with pessimism about the prospect of high returns in these markets.

Furthermore, the findings show that the degree of integration differs across these markets. When Latin America's market returns go up, the Chilean stock market rewards systematic risk more than the remaining stock markets, bringing better benefits in terms of portfolio diversification. Conversely, when Latin America's market returns go down, the Mexican stock market exhibits a lower risk premium than the rest of the selected stock markets.

As a whole, the results show that there are asymmetries in the risk premium as well as incomplete integration across the Latin American stock markets. This has important implications for using adequate policies for stabilizing the financial sector in such markets. Financial policies (for instance, the creation of a center for free cross-listing and trading of Latin American stocks) that support an increase in the degree of integration across these markets are beneficial for Latin America as a whole. These policies can improve investors' knowledge about the fundamentals of the Latin American stock markets, and thus, increase the efficiency of these markets. Moreover, under full stock market integration the cost of capital on average could fall, contributing to increase the economic growth in every Latin American country.


Copyright 2001 Eduardo E. Sandoval. All Rights Reserved.

Granting Institution

University of Texas-Pan American