Analysis of Correlation and Diversification of Portfolios in the Integrated Market of Latin America

In this research paper the effect of the Latin American Integrated Market (MILA) on the co-movements and correlations between the residuals of indexes log-returns of Chile, Colombia, Peru and Mexico is measured with the help of Dynamic Conditional Correlation GARCH model. Moreover, the intercorrelations between countries participants of MILA and North American S&P 500 index are measured on the extent of integration. The results state that the creation of MILA provoked a slight decrease of correlation between residuals of daily log-returns of indexes, however, the correlation remained high, and thus there are no huge opportunities for diversification. Furthermore, the effect of entrance Mexico into the market is measured, and results suggest that after the entrance of Mexican Stock Excahnge into the MILA the level of correlation between residuals remained almost the same. Further, the appearance of MILA decreased the average correlation between these four Latin Countries with North American index, and the entrance of Mexico caused even further decrease, however the average level of integration remains high.