Oil price and financial markets contagion in Pacific Alliance economies during the first two decadesof the 21st century

Abstract

This research studies whether fluctuations in Brent crude prices propagated to the exchange rate and equity markets of the Pacific Alliance (Chile, Colombia, Mexico, Peru) between 2000-2019. This period includes the formation of the block and excludes the structural change caused by the COVID-19 pandemic. Structural var models are employed by country to filter monthly returns, and eight contagion tests are applied: Pearson, Spearman, and Kendall correlations; Forbes-Rigobon adjusted correlation; local Gaussian bootstrap statistics; X² covolatility test; and two third-order co-bias tests. Calm and crisis regimes are identified using the Lunde-Timmermann bull/bear algorithm and the Mohaddes Pesaran realized volatility classifier. The evidence is replicated excluding the 2007-2009 global financial crisis. Results show a marked asymmetry: currency contagion is strong and persistent  in Mexico and Chile, moderate in Colombia, and sporadic in Peru. In contrast, stock market contagion is significant only in Colombia and Peru. These findings indicate that homogeneous policy responses within the Alliance may not be effective, and that investors must hedge currency and stock market
risks in a differentiated manner.