A0612
Title: Capital flows in integrated capital markets: The MILA case
Authors: Juan Vega Baquero - Universitat de Barcelona (Spain) [presenting]
Miguel Santolino - University of Barcelona (Spain)
Abstract: The Feldstein-Horioka study on investment flows through the correlation of domestic saving and investment concluded that liberalization of capital markets does not necessarily lead to a movement of capital looking for a better allocation of resources, as classical theory would suggest. Ever since, literature has been prolific regarding this ``puzzle'', with arguments for and against this conclusion. The aim is to analyze the issue from a different perspective. In recent years, the stock markets of Chile, Colombia, Mexico and Peru joined the Latin American Integrated Market (MILA) through an agreement that allows investors in any of the participating markets to invest in the others as if they were investing locally. Compositional methods are used to assess the hypothesis of a potential flow of capital between markets generated by the creation of the joint market. Vector autoregressive models are estimated and tested for structural breaks in both, the parameters and the variance of the errors. As a result, it was not possible to find a change in the composition of the investment in the four markets produced by the creation of the joint market. Furthermore, compositional models showed to be more informative than the traditional ones in terms of the significance of the parameters and parsimony.
