Latin American Emerging Markets


This chapter presents Latin American emerging markets. Here we shall discuss two questions that are important to investors: (1) What are the financial, economic, and political characteristics of Latin America? And (2) what are the investment laws there? To answer the first question, the political, economic, financial, and compound risk indexes of the International Country Risk Guide (ICRG) are used. As regards investor regulation, on the other hand, shareholder rights, their enforcement, insider trading, and the barriers imposed on foreign investors are first discussed. Thus, to answer the second question, it is necessary to construct an Investment Law Index by which the relevant information is aggregated.


Stock Market Stock Return Foreign Investor Risk Index Inside Trading 


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  1. 10.
    Governments could also pursue appropriate policies in order to the improve regulatory framework of capital markets and bring domestic accounting and supervision standards into line with international standards, actions that eventually boost public confidence in the domestic market (see Pohl et al. (1995)).Google Scholar
  2. 11.
    These stock markets are the most studied of Latin American markets (see, e.g., La Porta et al. (1997, 1998, 1999, and 2000), Domowitz et al. (1997), Henry (2000), Rouwenhorst (1999), and Fama and French (1998)).Google Scholar
  3. 12.
    Or thanks to the turmoil, because the interest on the sovereign debt of these nations diminished (Levich (2001)).Google Scholar
  4. 14.
    In particular, private capital flows increased and a shift occurred in private flows from bank to non-bank sources to portfolio and direct investment (see Claessens (1995)). The increase in order flow to Latin America has been in the form of ADRs, GDRs, funds, and a small amount of derivatives. Several factors have been important in the increase in the capital flows to the LAEM. The decline in international interest rates (Calvo, Leiderman, and Reinhart (1993)) and improved domestic policies give rise to higher growth rates (Chuhan et al. (1993)) and market liberalization (Claessens and Rhee (1994)).Google Scholar
  5. 17.
    The ICRG is a private provider of risk ratings that have proved to be reliable. The ICRG’s risk ratings have been cited by important publications, such as LaPorta et al. (1997) and Erb et al. (1996), as well as in documents published by the International Monetary Fund and World Bank, among other international institutions. Country reports of the ICRG include descriptive assessments and economic data. The ICRG provides ratings for 140 countries on a monthly basis.Google Scholar
  6. 18.
    Institutional Investors is a provider of country risk ratings. The risk measures of Institutional Investors are based on a survey applied to leading international bankers who are asked to rate each country. According to the information of Institutional Investors, to compute the ratings, respondents with greater exposure and more sophisticated country analysis get greater weights. To identify the factors to be considered, survey participants are asked to rank the factors that they consider in preparing country ratings. Two important facts should be considered: (1) bankers rank factors differently for different group of countries and (2) their rankings have changed over time. Erb et al. (1996) provides a detailed description of the way in which Institutional Investors compute its ratings.Google Scholar
  7. 22.
    That is, the relation between the quality of information and market activity (Blume et al. (1994)).Google Scholar
  8. 30.
    For each of the first antidirector rights, La Porta et al. (1998) assign a country a score of 1 if it protects minority shareholders according to this measure, and otherwise 0. They also give each country a 1 if the percentage of share capital needed to call an extraordinary shareholder meeting is at or below the world median of 10%. Finally, they combine these six scores into one score.Google Scholar
  9. 32.
    Since 2001, 239 indictments have been registered in Mexico (Fernandez-Vega, C., 2002. México S.A., La Jornada, March 27, 2002, México.). The CNBV has imposed fines on individuals and intermediaries for insider trading and market manipulation. However, the names of the penalized individuals and intermediaries have not been disclosed, since authorities contend that there have been no sufficient legal grounds to do so.Google Scholar
  10. 33.
    Information from Bhattacharya and Daouk (2002).Google Scholar
  11. 35.
    For details on how IFCI.MCAP and IFCG.MCAP are computed, see EMDB-International Finance Corporation, July 1999. The IFC Indexes: Methodology, Definitions, and Practices.Google Scholar
  12. 37.
    La Porta et al. (1998) developed an antidirector rights index, which is similar to the SH-Index. The difference between them is that the SH-Index additionally includes mandatory dividends and the percentage of capital to call an extraordinary shareholder meeting. However, the results do not have an important impact on the IL-Index.Google Scholar

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© Deutscher Universitäts-Verlag/GWV Fachverlage GmbH, Wiesbaden 2006

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