Taylor & Francis, Ltd. Emerging Markets Finance & Trade

Commodity Prices and Stock Market Behavior in South American Countries in the Short
Run
Author(s): Robert Johnson and Luc Soenen
Source: Emerging Markets Finance & Trade, Vol. 45, No. 4 (Jul. - Aug., 2009), pp. 69-82
Published by: Taylor & Francis, Ltd.
Stable URL: https://www.jstor.org/stable/27750680
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Commodity Prices and Stock Market Behavior in
South American Countries in the Short Run
Robert Johnson and Luc Soenen
ABSTRACT: Using Geweke feedback measures, we present empirical evidence that largely
supports the hypothesis that the stock markets of South American countries are highly
affected by changes in commodity prices after controlling for changes in exchange rates,
interest rates, and North American stock market changes. In total, six different Goldman
Sachs commodity price indexes are tested against the unexplained variation in stock
market returns for Argentina, Brazil, Chile, Colombia, Peru, and Venezuela, covering the
period 1995-2007. The Argentinian, Brazilian, and Peruvian stock markets are signifi
cantly affected by changes in commodity prices the same day. Venezuela's stock market,
however, does not react to changes in commodity prices, even including energy prices.
Stock market returns for Chile show a contemporaneous relation with energy and metals
prices, whereas Colombia's equity market is affected by price changes for agricultural and
industrial metals. In all cases, we find a contemporaneous relation and no indication of a
lead or lag relationship.
KEY WORDS: commodities, South America, stock markets.
Although some South American stock markets have existed for a long time?Brazil's
since 1877 and Argentina's since the early 1900s?their history has been discontinuous.
As with many other emerging markets, their functioning often has been interrupted for a
number of reasons, including war, political turmoil, expropriations, hyperinflation, and
economic collapse (see, e.g., Alper and Onis 2003). Two of the most recent examples of
the disconcerting level of instability in South American markets are the 1999 Brazilian
and the 2001 Argentinian financial crises. A unique feature of emerging capital markets
is the apparent pattern of contagion. On a day-to-day basis, stocks from emerging capital
markets are not highly correlated across countries; however, when a financial crisis?a
collapse of both stock and currency values?develops in one country, it sometimes seems
to leap from that country to others like a contagious disease, so that cross-country correla
tion is suddenly high (Beim and Calomiris 2001).1 The abrupt collapse of the Mexican
currency and capital markets at the end of 1994 sent the economy in a tailspin, resulting
in important spillover effects in Argentina and Brazil.
Emerging equity market returns also have a strong local character, as the exposure to
global risk factors cannot explain their average returns (Rouwenhorst 1999). In addition,
only a handful of emerging markets float enough shares to offer international investors
the chance to diversify their portfolios. Most emerging markets are highly concentrated
and lack liquidity, as most shares are not actively traded. As with fully developed capital
Robert Johnson (johnson@sandiego.edu) is a professor of economics at the University of San Diego

School of Business. Luc Soenen (lue.soenen@pucp.edu.pe) is a professor of finance at Centrum
Catolica, Pontificia Universidad Catolica del Peru, Lima. The authors are grateful to the editor,
Ali M. Kutan, and the referees for their helpful comments.
Emerging Markets Finance & Trade I July-August 2009, Vol. 45, No. 4, pp. 69-82.
Copyright ? 2009 M.E. Sharpe, Inc. All rights reserved.
1540-496X72009 $9.50 + 0.00.
DOI 10.2753/REE1540-496X450405
70 Emerging Markets Finance & Trade
markets, emerging markets suffer from a strong home bias, making equity returns even
more dependent on value drivers for the local economy.
This paper focuses on six South American economies, all of which have gone through
privatization, trade, and financial market liberalization since the 1980s. These countries
have changed from restrictive to open economic policies. As stated by Elton (1999), a
fundamental issue in finance is which factors affect the expected returns on assets, the
sensitivity of expected returns to those factors, and the reward for bearing this sensitiv
ity. As a related issue, predicting stock market behavior has long been one of the most
elusive goals for investors in developed markets, but recently has also included emerg
ing markets. An empirical study by Rodriguez (2007) reports that Latin American fund
managers demonstrated forecasting ability, as evidenced by a positive and statistically
significant attribution return. The fund managers outperformed a regional benchmark
when measured with Jensen's alpha. Most recently, Carvalhal and Vaz de Melo Mendes
(2008), using autoregressive moving average (ARMA) and autoregressive conditional
heteroskedasticity (ARCH) models, have shown some success in predicting stock returns
for Latin American and Asian markets, outperforming the random walk. Consistent with
the findings of Harvey (1995), Onder and Simga-Mugan (2006) show that both economic
and political factors as well as local specific market characteristics strongly influence
returns in emerging markets. A recent study by Osterholm and Zettelmeyer (2007)
has shown that external shocks account for 50 to 60 percent of the variation in Latin
American gross domestic product (GDP) growth, one of those shocks being commodity
prices. Following the financial and economic crises of the late 1990s and the early years
of this decade, South American countries have enjoyed a spectacular recovery, explained
partly by rising commodity prices but also due to high world economic growth and the
continuing liberalization of the capital markets. Because the competitive base for export
performance in these countries is dominated largely by nonmanufactured goods, such
as raw materials,2 we particularly investigate the extent to which their stock markets
are affected by international commodity prices. This paper contributes to a large and
diverse body of literature on the effects of external factors on economic growth and stock
market returns. We concentrate on commodity prices as real shocks to the economies of
South America and attempt to investigate their degree of importance as a determinant
of short-term stock market behavior. In particular, using Geweke measures of feedback,
we investigate whether commodity prices lead or lag stock market movements. In short,
we examine the level of influence commodity prices have on stock market behavior in
the six major South American markets.
South America's Economies and Commodity Trade
The internationalization of emerging stock markets in general has occurred as a result

of various forms of foreign investment liberalizations. International liberalizations have
taken the form of closed-end country funds, American depository receipts (ADRs), and
the elimination of foreign investment restrictions for domestic stocks. According to
Hargis (2000), before 1991, closed-end country and regional funds were the main vehicle
for foreign participation in South American stock markets. Between 1991 and 1993,
international share offerings, usually in the form of ADRs, became the major source of
equity flows.3 Since 1993, the importance of flows into the domestic equity market has
increased. Also, cross-listings have become increasingly popular for South American
companies in recent years. Foester and Karolyi (1998) find empirical support for these
July-August 2009 71
perceptions; cross-listing increases firm value by expanding the shareholder base and
importing liquidity.
We concentrate on six South American markets: those of Argentina, Brazil, Chile,
Colombia, Peru, and Venezuela. Each of these countries deregulated its economy and
allowed foreign investors to enter the domestic market. They also went through financial
liberalization, making the local stock market a productive instrument for real economic
growth. As is the case for many emerging markets, these South American stock markets
consist of a relatively small number of listed companies and have few market participants.
This is in part explained by the lack of developed local pension and mutual funds (Chile
is an exception) and the very limited float of closely held companies. As a consequence,
these equity markets are highly concentrated. Argentina's stock market remains shallow,
with ten companies accounting for 95 percent of total market capitalization. Similarly,
Peru's stock market lacks liquidity, with 70 percent of the listed stocks being traded on
fewer than 10 percent of trading days. The Venezuelan stock market has only fifty-nine
listed companies with a market capitalization of 5 percent of GDP (Economist Intelligence
Unit 2006). These characteristics can reduce the risk-sharing opportunities and liquidity
of the stock market, inhibiting further domestic stock market development.
In general, commodity markets are significant in transmitting disturbances internation
ally, linking commodity-importing countries to commodity-exporting countries. It is to be
expected that South American countries are vulnerable to the vagaries of world commodity
prices due to the great importance of the commodity trade for those countries. Santiso
(2007) states that the bulk of exports by multinationals?75 percent?are related to oil,
gas, and minerals, which is not surprising, as more than one-third of all Latin American
exports are commodity related. Based on Economist Intelligence Unit (2006) reports, we
briefly illustrate the high dependence of these South American economies on the supply
and demand, and therefore price behavior, of specific commodities.
Agriculture together with agroindustries account for more than half the goods output
and 54.3 percent of total export earnings for Argentina. The country is a major world
producer of cereals, soybeans, and beef. Although the country has substantial mining
potential of copper, gold, and uranium, Argentina lacks a tradition of minerals extraction
with the exception of natural gas and oil.
Brazil is the world's largest producer and exporter of raw and processed materials.
Apart from its major oil and gas reserves, the country's enormous mineral deposits
include reserves of iron ore, bauxite, manganese, tin, and gold. Brazil's manufacturing
industry?of machine tools, electrical and telecommunications equipment, cars, and
aircraft?is the largest and most diverse in South America.
Chile is estimated to have over one-third of the world's copper reserves and is by far
the world's largest copper producer. Mining, a major sector in Chile's economy, accounts
for 56 percent of the goods exported, with copper representing 42 percent of goods exports
in 2005. Chile also has great agricultural potential, as agricultural production has adapted
well to free markets and the gradual lifting of protectionist barriers since the mid-1970s.
Chile is now the largest fruit exporter in the southern hemisphere. Aquaculture (maritime
fish, salmon in particular) is expected to be one of the most dynamic engines of economic
growth in Chile in the next decade.
Coffee is still Colombia's single most important crop, though the country lost sub
stantial market share to global competitors, particularly Brazil and Vietnam. Colombia
remains the world's second-largest coffee producer after Brazil. It is also the second-largest
exporter of flowers after the Netherlands and the world's largest exporter of bananas
after Ecuador and Costa Rica. The country has the largest proven coal reserves in Latin
America. Commodities continue to dominate exports, with oil as the largest single export,
followed by coal and coffee.
Minerals are traditionally Peru's most important source of export revenue, averaging
50 percent of total export earnings. The mining sector has also consistently been the
fastest-growing sector in recent years. Gold has been the main success story since the
late 1990s. Gold was Peru's largest single export earner from 1998 to 2003, when it was
overtaken by copper in 2004 as copper prices rose. The country has 15 percent of the
world's copper reserves and production has increased sharply since the mid-1990s. Peru
is also the world's largest exporter of fishmeal, used in fish farming and aquaculture.
The Venezuelan economy has enjoyed an oil-driven boom since 1993. Venezuela has
a wealth of mineral reserves; in addition to oil and gas, it has huge deposits of industrial
raw materials and precious metals. The country has the largest untapped gold reserves in
Latin America and 12 percent of total global gold reserves. However, oil earnings dwarf
all other trade items, accounting for an average of 82 percent of total export revenue
from 2001 to 2005.
Considering the importance of commodity trade for the six South American countries
in this study, it is to be expected that their economies are vulnerable to the vagaries of
world commodity prices.
Data and Method
The data used for the analysis are stock market and commodity price indexes from 1995
to 2007. All data are closing prices collected from Datastream. The data include daily
total market return indexes in local currency and daily Goldman Sachs commodity price
index series in U.S. dollars. Although daily data are likely to reflect greater volatility,
our previous research (Johnson and Soenen 2002) has indicated that most significant
stock market reactions to changes in other market prices occur within a few days. Total
stock market returns are collected for six South American countries?Argentina, Brazil,
Chile, Colombia, Peru, and Venezuela?and for the North American region. The Gold
man Sachs commodity price index (GCPI) currently contains twenty-four commodities
from all commodity sectors?that is, six energy products, five industrial metals, eight
agricultural products, three livestock products, and two precious metals.4 Daily stock
and commodity market returns are calculated using ln(r/rM), where r represents the
daily price index series, to obtain unbiased estimated daily stock and commodity market
returns. All variables were either collected in or have been converted into local currency
values using MSCI exchange rates.
We follow a two-stage analysis. First, a vector autoregressive (VAR) system is es
timated for each of the six South American countries. The residuals from each VAR
system for the equation with the total return stock market index in the country of interest
as the dependent variable are saved for the second stage. Next, the residuals are used to
compute Geweke measures between the residual series?that is, the variation in stock
market returns for each country not explained by the VAR system and the rate of return
series of various commodity price indexes.
Geweke (1982) developed measures of feedback based on log likelihood ratio statistics,
which provide a cardinal measure of the degree of comovement. An increase (decrease)
in a Geweke measure, from year to year, reflects the magnitude of increase (decrease)
of a stock market's reaction to commodity price changes. Three Geweke measures of
July-August 2009 73
feedback are estimated for each of the six South American stock markets paired with the
GCPI for each year. Each Geweke measure represents a log likelihood ratio statistic for
a null hypothesis, devised to test whether the stock market returns and the commodity
price index move together on the same day (HI) or whether changes in the GCPI leads
(H2) or lags (H3) the stock market movements by between one and ten days. The three
hypotheses are stated as follows:
HI: There is no contemporaneous relationship between rjt and vjt on the same
day.
H2: The variable rjt does not lead rjt across days.
H3: The variable xit does not lead rjt across days.
where rjt represents the daily equity return in one of the South American countries, and
rjt represents the daily return in the GCPI. The asymptotic distribution of each Geweke
measure is also known under the alternative hypothesis that feedback is present.5 This
approach provides an important advantage over other means for testing the hypotheses,
such as the Wald F-test, because Geweke measures are cardinal measures of comove
ment that allow us to determine the economic causes of greater comovement in stock
market returns.
Results
VAR Analysis
We estimate a VAR model for each of the six South American countries using each
country's total return stock market index, exchange rate with the U.S. dollar, short-term
interest rate, and the North American total return stock market index, collected in U.S.
dollars and converted to local currency, as endogenous variables. These control variables
are linked to macroeconomic conditions (Bekaert and Harvey 2000) and the degree of
integration with the North American equity markets. The stock market total return in
dexes, exchange rate series, and GCPI total return indexes are all 1(1), but the interest
rate series are 1(0). Hence, the stock market total return indexes, exchange rate series,
and GCPI total return indexes were converted to rates of return calculated as ln(fr,/fr,_,)
to make them 1(0) series.
The following VAR is estimated:
yt = c + A<yt_x + A2yt_2 + ... + ApyHl + et?
where yt is a k x 1 vector of endogenous variables, c is a k x 1 vector of constants, Af is

a k x k matrix (for every / = 1, p), and e, is a k x 1 vector of innovations that may be
contemporaneously correlated but are uncorrelated with their own lagged values and
uncorrelated with all of the right-hand-side variables vector of error terms. The appropri
ate lag length (p) was selected using the Akaike Information Criterion (AIC).7 The basic
results from the VAR regressions are as follows.
The R2 for the stock market return equations, that is, RIjt?the first equation in each
VAR model represented in note 7?averaged 9.4 percent, or 10.6 percent for Argentina
(RIARJ), 5.4 percent for Brazil (RIHR t), 8.7 percent for Chile (/?/cu), 9.5 percent for Co
lombia (RICB,t)i 13.9 percent for Peru (RIPEJ), and 8.2 percent for Venezuela (RIVEJ). The
summary in Table 1 lists the average for the six regressions.
Table 1. Average for six countries

VAR analysis Results
R2 (percent) 9.38
Adj. R2 (percent) 6.92
Standard error equation 0.01264
F-statistic 5.66982
Log likelihood 10,302
Mean dependent 0.00057
Standard deviation dependent 0.01308
Number of lags in VAR 22.66667
Three observations concerning the impulse response functions8 from the six VAR
systems are summarized below. To save space, the graphs showing the actual impulse
response functions and the accumulated impulses are available upon request from the
authors.
The results can be summarized as follows:
1. All the impulse response functions for the RIi t showed positive responses to a
shock to the RINAt variable for one or two periods and vice versa. Because the
innovation responses die out to zero and the accumulated responses are asymp
totic to a positive constant, the VARs are stationary.
2. The impulse response functions for the RIj t showed small but significant first
period responses to XRit shocks and vice versa. The responses were positive for
Argentina but negative for Brazil, Chile, Colombia, and Peru, and insignificant
for Venezuela.
3. The impulse response functions for the IRj t showed small but significant first
period responses to IRj t shocks. The responses were positive for Argentina but
negative for Brazil, Chile, Colombia, and Peru, and insignificant for Venezuela.
The variance decomposition tables show that the percentage of the forecast variance
for each endogenous variable explained by its own lagged values range from 98 percent
to 99 percent.
Table 2 displays a separate variance decomposition for each endogenous variable.
The second column (labeled Standard error) contains the forecast error of the variable
at the given forecast horizon. The source of this forecast error is the variation in the cur
rent and future values of the innovations to each endogenous variable in the VAR. The
remaining columns give the percentage of the forecast variance due to each innovation,
with each row adding up to 100.
Geweke Measures of Feedback
Table 3 summarizes the results from the three Geweke measures. They are calculated
using daily rates of change in the equity price index (ln(/yP,_,)) for six South American
countries versus the GCPI.
HI is a test of the hypothesis that there is no contemporaneous relation between the
percent change in the GCPI and the stock market returns of the respective South Ameri
can country on the same day. Each statistic has an approximate %2 distribution with one
degree of freedom under the hypothesis of no contemporaneous relation. The empirical
DLOG(RINA*XRAR)
0.0120 0.3036 0.7196 1.1505 0.6313
0.0926
0.0004 0.0173 0.0002 0.2491

IRAR
0.0026 0.1396
DLOG(XRAR)
0.0247 0.0045 0.0000 0.1020 0.0012
0.0010
Period Standard error DLOG(RIAR) 1 0.016685 100.00 1 0.015751 100.00 1 0.009768 100.00 1 0.015287 100.00
2 0.016837 99.96 2 0.015833 99.89 1 0.00807 2100.00
0.008318 99.69 2 0.010045 99.18 2 0.01042 98.60
1 0.01029 100.00 2 0.01571 99.23
Table 2. Variance decomposition tables
DLOG(RIAR) DLOG(RIBR) DLOG(RICL) DLOG(RICB) DLOG(RIPE) DLOG(RIVE)
Nl
1995 1.2 8.8 14.9 1.9 19.5** 21.2** 0.5 12.8 9.7
1999 0.22000
12.8 7.80.1 6.621.5**
0.9 16.1* 9.6 4.9**
0.6 15.6 9.13.8 13.6 2.8* 8.4 17.1* 2004 0.5 11.8 8.1 0.1 26.4*** 13.5 1.7 8.7 6.2
2005 0.0 13.2 9.8 0.5 19.5** 4.9 0.0 6.7 5.4
1997 4.8** 14.2 7.2 6.1** 7.1 7.7 0.1 10.5 19.2** 2001 0.2 15.2 13.0 2.7* 11.2 15.5 0.8 10.2 11.4
1996 3.5* 3.1 8.1 1.6 12.3 10.8 0.2 9.8 9.1
Dates_Hl_H2_H3_Hl_H2_H3_Hl_H2_H3
2002 18.9*** 5.2 18.9** 2.8* 7.1 26.0*** 0.1 13.1 10.2
1998 6.4** 17.3* 3.9 1.0 12.4 8.6 0.0 5.5 11.8 2003 0.2 20.1** 8.0 16.0*** 7.7 8.5 0.0 6.9 6.1 2007 19.4*** 3.3 11.1 7.2*** 2.5 14.0 2.3 5.1 9.2
2006 19.4*** 8.7 6.2 0.2 7.3 9.8 1.3 3.9 6.1
1995-2007 20.9*** 2.6 11.7 7.5*** 2.5 10.8 2.6 2.6 8.3
Table 3. Geweke tests for percent change in the Goldman Sachs commodity price index (GCPI)
GCPI Argentina Brazil Chile
Venezuela
Peru 1998 0.0 3.8 13.1 0.0 10.2 19.3** 2.4 11.4 25.5*
1996 3.6* 9.2 29.3*** 0.0 8.6 20.0** 6.9*** 14.1 8.0 2001 2.2 10.7 14.3 0.3 4.820025.82.40.018.7**20.3**
10.4 3.0*15.6
17.9* 21.3** 17.7*** 16.0 4.4 2005 0.0 6.4 15.1 3.6* 24.5***20069.9 0.6.0110.** 06.3.7814.11.53*** 4.7 21.4** 2.3 18.6** 18.0*
2007 0.1 4.8 7.2 13.4*** 14.1 10.1 0.9 5.7 18.5*
nificance at the 10Dates_Hlpercent level; ** significance at the 5 percent level; *** significance at the 1 percen
2003 0.0 15.9 8.3 6.2** 4.6 18.8** 0.2 3.2 15.0
2004 3.9** 10.3 14.1 10.0*** 16.1* 2.7 0.2 12.9 14.3
1999 0.0 6.9 11.0 0.1 8.1 10.5 1.4 12.1 6.0 1995-2007 0.0 4.0 8.8 11.7*** 15.1 8.2 1.2 6.2 16.8*
1995 0.3 5.9 8.4 0.7 10.8 9.8 0.9 6.5 6.1 2000 1.3 5.8 7.5 1.7 10.4 9.5 1.6 2.6 8.2
_H2_H3_Hl_ H2_H3_Hl_H2_H3_
1997 0.7 19.9** 27.1*** 0.5 6.4 8.1 1.5 6.3 12.2
H2: GCPI returns do not lead changes in stock market returns. H3: changes in stock market returns do not lead changes in GCPI.
Colombia
GCPI
results show a significant contemporaneous comovement (1 percent level) for Argentina,

Brazil, and Peru for the period 1995-2007, the most recent years, in particular. None of
the other three South American countries exhibit any contemporaneous association be
tween same-day stock market returns and commodity price changes for the entire period.
The largest anomaly is, of course, Venezuela, where agricultural products and minerals
represent the highest percentage of GDP (25.53 percent), indicating that its market and
the other two stock markets must move on variables other than international commodity
prices. The case of Venezuela may be partly explained by political factors.
H2 tests the hypothesis that changes in the GCPI returns do not lead the changes in
the stock market returns of the six South American countries within ten days. H3 tests
whether changes in the local stock markets do not lead the changes in the commodity
price index returns within ten days. As can be concluded from Table 3, we do not find
any lead or lag relation between the stock market and commodity price returns within
a time frame of ten days for any of the six South American countries. Apparently, stock
prices move on the same days that commodity prices change for Argentina, Brazil, and
Peru, indicating that investors factor the effects into market valuations on the same day
without waiting to see if the changes are permanent.
Of the ten economic sectors provided by Euromonitor International's Global Market
Information Database, two stand out as being particularly dependent on commodity
prices and relevant for the countries under consideration. The first economic sector is
agriculture, hunting, forestry, and fishing; the second is mining and quarrying. Table 4
presents the percentage of GDP originating from these sectors of the economy for the
six countries for 2000-2005. To better illustrate the relative importance of both sectors,
comparable data are provided for Mexico, Canada, the United States, and the North
American region.
Considering the importance of both sectors, the three Geweke measures of feedback
have been calculated for five Goldman Sachs commodity price subindexes: agriculture,
energy, livestock, industrial metals, and precious metals. The tables with detailed Geweke
test results for these five commodity price subindexes are not reported here for the benefit
of space but are available from the authors upon request.
A significant (5 percent or better) contemporaneous relation between local stock mar
ket returns and the Goldman Sachs agricultural commodity price index is found for four
of the six countries: Argentina, Brazil, Colombia, and Peru. Excepting Colombia, these
markets also show a significant (1 percent level) association with changes in the agricul
tural commodity prices. The effect is not only significant for the period 1995-2007 as a
whole, but for Colombia and Peru, also for the most recent years. Excepting Venezuela,
these four countries have the highest percentage of GDP originating from agriculture
(see Table 4a). Agricultural commodity price volatility seems to be reflected in same day
stock market prices. This can be interpreted as a sign of market efficiency, especially
because, again?excepting a lag relation (5 percent level) for Brazil?we find no lead or
lag relation for any of the six South American economies. We find no relation between
agricultural commodity prices and stock market behavior for Chile and Venezuela. Both
countries have the lowest percentage of GDP derived from agricultural trade.
Energy (oil and gas) prices significantly affect stock market return for three countries,
Argentina, Brazil, and Peru. The relationship is particularly strong (1 percent) for Argen
tina since 2006. Chilean stock market returns show a less significant (10 percent) relation
with energy prices. Changes in energy prices are reflected in stock market movements the
same day, but once again, no significant lead or lag relation can be observed.
8.027.494.39
9.65 8.719.04 7.964.3511.11 11.826.554.07
4.5310.626.78 7.134.063.47
4.113.421.86
3.551.801.21
1.970.991.26
1.021.06 1.09
2000 2001 2002 2003 2004 2005 Average
_2000_2001_2002_2003_2004_2005_Average
Chile 7.10 7.03 6.58 6.83 9.57Peru

10.555.22
7.944.92 5.50 6.26 7.88 9.42 6.53
4.57 10.217.46
10.337.754.73
8.884.6712.41
4.2612.157.56
11.707.194.24
6.974.113.73
4.233.552.08
3.482.020.97
1.950.911.04
1.040.98 1.11
Brazil 2.31 2.57 3.03 3.50 3.76 4.37 3.26
Argentina 2.50 2.48 5.97 5.46 5.26 5.42 4.52 Colombia 6.20 5.00 5.00 5.91 6.06 6.04 5.70
Mexico 1.28 1.25
Canada
1.23 1.20
5.66 1.31
5.36 1.31
4.64 1.26
5.89 6.87 7.28 5.95
Venezuela 19.31 14.47 19.21 22.28 25.57 27.67 21.42
Table 4a. Percentage of GDP originating from agriculture, hunting, forestry, and fishing
United States 1.24North

1.17 America
1.02 1.311.54
1.471.45
1.871.26
1.351.64 1.89 2.32 1.68
Table 4b. Percentage of GDP originating from mining and quarrying
North America 1.08

United States 1.00
Colombia 12.94
Argentina 4.68
Venezuela 3.95
Brazil 7.12 Canada 2.11

Mexico 3.68
Chile 4.80 Peru 7.76
Livestock pricing seems to have a minor effect on stock market returns for these South
American countries. However, a significant relation (1 percent) is found for Argentina,
Brazil, and Colombia, especially in recent years. No significant relation is reported in
terms of leads or lags. Livestock seems to have no real effect on stock market behavior
in Chile, Peru, and Venezuela.
Mining and quarrying is another very important industrial sector that represents a
major fraction of GDP for South American countries (Table 4b). The stock market returns
of Argentina, Chile, and Peru are significantly (all at 1 percent) affected by same-day
changes in the industrial metals commodity price index. The Colombian stock market
shows a significant relation with industrial metal prices at the 5 percent level. Again, no
significant lead or lag relation is noted. The stock markets of Brazil and Venezuela do
not seem to be affected by changes in industrial metal prices. The case worth noting is,
of course, Venezuela. Although the country derives the highest percentage (21.4 percent;
see Table 4b) of its GDP from mining and quarrying, the results clearly show that its
stock market is driven by variables other than industrial or even precious metal prices.
Also, notwithstanding the importance of its oil and gas industry, the Caracas stock market
shows no relation with the energy commodity price index.
A similar result is found for precious metal prices. However, this time, four countries?
Argentina, Brazil, Chile, and Peru?show a significant (all at 1 percent) contemporaneous
relation between their stock markets' returns and changes in precious metal prices. In
contrast, Colombia and Venezuela show no relation between their stock market returns
and changes in the Goldman Sachs precious metals price index for the period 1995-2007.
We find a much stronger relation between Chilean stock market returns and changes in
industrial metals than changes in precious metals. This could be because most of Chile's
mining is for nonprecious ore, copper in particular. Once more, we find no statistically
significant (5 percent or better) lead or lag relation between precious metal prices and
the stock market for the six South American countries.
Conclusion
The high importance of commodity compared to manufactured goods trade cannot be
ignored in South American countries. Considering that stock markets reflect the current
and anticipated state of the economy, we tested for the effect of world commodity prices
on stock market returns.
The stock markets of Argentina, Brazil (except industrial metals), and Peru (except
livestock) show a consistent and statistically significant contemporaneous relation with
changes in the various commodity price indexes. It can be concluded that the stock markets
of Argentina, Brazil, and Peru are highly affected by same-day changes in commodity
prices. The stock returns of the Argentinian and Peruvian exchanges are particularly
influenced by changes in the prices of industrial and precious metals. An extreme case is
Venezuela, for which there is no empirical evidence for any effect of the six commodity
price series on its stock market returns for the entire period.9 Clearly, the stock market
in Caracas does not move in accordance with energy prices; we assert that it moves on
variables other than commodities.
Colombia's stock market seems not to react to changes in commodity prices in general,
but does so with respect to prices for agricultural, livestock, and industrial metals com
modities. The Chilean stock market has same-day reactions to price changes in energy,
industrial (e.g., copper), and precious metals.
July-August 2009 81
Overall, no lead or lag relation of any significance is found. The stock markets of
South America seem to have same-day reactions to commodity price changes and are
being neither led nor lagged by them.
We believe that our findings are potentially relevant for international portfolio in
vestors, as country exposure to real shocks in the world economy, such as commodity
prices, is paramount in emerging market funds. This study may open up avenues for
further research, as not only South American countries have lately benefited highly
from ballooning commodity prices; countries such as Russia, Saudi Arabia, the United
Arab Emirates, and South Africa also have been strong in raw material exports and have
experienced quite extraordinary economic development. Similar studies should be car
ried out in other emerging markets before generalizing our results, but the present study
demonstrates the need to recognize the effects of commodity prices on stock market
returns for some countries.
It would also be of interest to examine the extent to which high commodity prices have
facilitated South American companies' overseas activities and the formation of "multi
latinas," or transnational Latin American-based corporations. Our study has focused on
the short-term effect of world commodity prices on stock price behavior in six South
American countries. It would be of great interest to examine whether long-term trends
in commodity prices have a lasting effect on stock market performance. As Hilmola
(2007) asks, can commodity prices become one underlying factor explaining economic
long-cycle patterns?
Notes
1. Jacquier and Marcus (2001) and Longin and Solnik (1995) were the first to suggest that a
correlation in country portfolio returns increases during periods of turbulence in capital markets.
If so, benefits from diversification would be lost exactly when they are needed the most.
2. Catao and Falcetti (2002) report considerable export sensitivity to world commodity prices
for Argentina.
3. Many of the early offerings reflected the privatization of previously state-owned enter
prises. Since 1992, however, many nonprivatized firms have begun to list in the United States and
domestically (Hargis 2000).
4. See www2.goldmansachs.com/client_services/trading_capital_markets/commodities_
index/#economic for more information on the components, weights, and method of calculation.
5. We refer the reader to Bracker et al. (1999) and Geweke (1982) for the theoretical develop
ment of this measure.
6. The VAR system for Argentina (AR) can be written out as follows:
*'/,=<+i/'W-jR'u-j+ijj>z-jXRu-j+1 ?f ?;:,-,?/.,-, +i?f<^*w,-+v?
ir?=si:,+v^x-jMu-,+it.x.jxru.j+izx-jiRu-j+s;::c,*w;+?>,
mrna., = yt+l'py?,-jR',,-j + 1^iZ-jXRu-j + S^yI?-? + Im^^-j +<p
where RILl_p is the rate of return for the total return stock market index in country / for period t-p,
XRLl is the rate of change in the number of country / currency units/U$ for period t - p, IRi H) is the
annualized short-term interest rate in country / for period t-p, and RlNAj_p is the rate of return for the
market total return stock index for the region of North America (i.e., Canada and the United States)
for period t - p. The number of lags selected for each country VAR (p) = Argentina (40), Brazil
(21), Chile (12), Colombia (23), Peru (33), and Venezuela (9). Six VAR systems were estimated,
one for each country /, where i = Argentina, Brazil, Chile, Colombia, Peru, and Venezuela. The
residual series were saved from the first equation of each VAR for stage II (e.g., v,,).
7. The numbers of lags selected by AIC were as follows: Argentina (40), Brazil (21), Chile
(12), Colombia (23), Peru (33), and Venezuela (9). The AIC indicated more lags than the Schwarz
criterion and Hannan-Quinn criterion for all VAR systems.
8. Generalized impulses, as described by Pearsan and Shin (1998), were used to construct an
orthogonal set of innovations that do not depend on the VAR ordering.
9. However, we find a significant relationship only for the years 1996, 2002, and 2005. We
have no explanation for the same-day comovement between stock returns and commodity prices
for these specific years.
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Commodity Prices and Stock Market Behavior in South American Countries in the Short

KEY WORDS: commodities, South America, stock markets.

Robert Johnson (johnson@sandiego.edu) is a professor of economics at the University of San Diego

South America's Economies and Commodity Trade

The internationalization of emerging stock markets in general has occurred as a result

Data and Method

yt = c + A<yt_x + A2yt_2 + ... + ApyHl + et?

where yt is a k x 1 vector of endogenous variables, c is a k x 1 vector of constants, Af is

Table 1. Average for six countries

Geweke Measures of Feedback

0.0004 0.0173 0.0002 0.2491

Table 2. Variance decomposition tables

DLOG(RIAR) DLOG(RIBR) DLOG(RICL) DLOG(RICB) DLOG(RIPE) DLOG(RIVE)

GCPI Argentina Brazil Chile

results show a significant contemporaneous comovement (1 percent level) for Argentina,

2000 2001 2002 2003 2004 2005 Average

Chile 7.10 7.03 6.58 6.83 9.57Peru

United States 1.24North

Table 4b. Percentage of GDP originating from mining and quarrying

North America 1.08

Brazil 7.12 Canada 2.11

'/,=<+i/'W-jR'u-j+ijj>z-jXRu-j+1 ?f ?;:,-,?/.,-, +i?f<^w,-+v?

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