doiSerbia

Interdependence of NAFTA capital markets: A minimum variance portfolio approach

López-Herrera Francisco (Universidad Nacional Autónoma de México, Facultad de Contaduría y Administración, México)
Santillán-Salgado Roberto J. (EGADE Business School, Tecnológico de Monterrey, México)
Ortiz Edgar (Universidad Nacional Autónoma de México, Facultad de Ciencias Políticas y Sociales, México)

We estimate the long-run relationships among NAFTA capital market returns and then calculate the weights of a “time-varying minimum variance portfolio” that includes the Canadian, Mexican, and USA capital markets between March 2007 and March 2009, a period of intense turbulence in international markets. Our results suggest that the behavior of NAFTA market investors is not consistent with that of a theoretical “risk-averse” agent during periods of high uncertainty and may be either considered as irrational or attributed to a possible “home country bias”. This finding represents valuable information for portfolio managers and contributes to a better understanding of the nature of the markets in which they invest. It also has practical implications in the design of international portfolio investment policies.

Keywords: NAFTA, stock markets, international diversification, financial integration, optimal portfolios