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Testing the Existence of Lead-Lag Effects Between the US and Brazilian Stock Markets

Author

Listed:
  • Gustavo Rezende de Oliveira

    (University of Brasilia)

  • Otavio Ribeiro de Medeiros

    (University of Brasilia)

Abstract

This article examines the existence of lead-lag effects between the U.S. stock market (NYSE) and the Brazilian stock market (Bovespa), i.e., whether upward and downward price movements in the NYSE are followed, on average, by similar movements in Bovespa, which would enable predicting stock prices in the Brazilian market, thus providing arbitrage opportunities. The existence of this effect would indicate a relative segmentation between these two markets, which would violate the efficient market hypothesis, whereby stock prices are unpredictable. Cointegration between the two markets was identified as well as the existence of bi-directional causality (Granger test). The results obtained from VECM, TSLS and GARCH regressions showed that the two markets are segmented and that returns of the Bovespa Index (Ibovespa) are to a large extent explained by the stock price movements in the Dow Jones Index some minutes beforehand. However, the results also show that the practice of arbitrage based on the lead-lag effects is not economically feasible due to transaction costs.

Suggested Citation

  • Gustavo Rezende de Oliveira & Otavio Ribeiro de Medeiros, 2009. "Testing the Existence of Lead-Lag Effects Between the US and Brazilian Stock Markets," Brazilian Business Review, Fucape Business School, vol. 6(1), pages 1-20, January.
    • Handle: RePEc:bbz:fcpbbr:v:6:y:2009:i:1:p:1-20
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    References listed on IDEAS

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    1. Poshakwale, Sunil & Theobald, Michael, 2004. "Market capitalisation, cross-correlations, the lead/lag structure and microstructure effects in the Indian stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(4), pages 385-400, October.
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    Cited by:

    1. Rešovský, Marcel & Gróf, Marek & Horváth, Denis & Gazda, Vladimír, 2014. "Analysis of the Lead-Lag Relationship on South Africa capital market," MPRA Paper 57309, University Library of Munich, Germany.

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