DYNAMIC RELA TIONSHIP BETWEEN EQUITY PRICES AND MACROECONOMIC CONDITIONS: EVIDENCE FROM EMERGING MARKETS

Abstract

In this paper we consider two emerging equity markets ofChile and Mexico. The purpose is to examine the responses o f equity prices to macroeconomic shocks and policy changes. Employing cointegration test and impulse response analysis, the degree of weak form efficiency in these markets is also examined. Our .findings indicate that although equity markets of Mexico and (hile are bec_oming increasingly more efficient in incorporating the past information, they do not reflect shocks to macroeconomic conditions rapidly. Empirical.findings also show that the equity market o f Chile has achieved higher degree o f efficiency than the equity market o f Mexico. These .findings have implications for individual and institutional investors in the US. and domestic.policy makers ofthese markets.