ABSTRACT
The turnaround of Latin American economies has been led by the forces of privatization and economic liberalization. The emergence of equity markets in Latin America is part of a general process of globalization of capital markets in the last decade. This chapter investigates diversification benefits and currency hedging benefits for investments in the equity markets of Latin America. We take the viewpoint of investors from six Latin American countries and of the US. Investing in any of the Latin American equities was more risky than investing in the domestic stock market. Five Latin American equity markets outperformed the US stock market over the 1989–1993 period. However, investors from Brazil, Chile and Mexico were not better off investing in foreign equities than investing in their domestic stock markets. Currency hedging is especially favorable to investors from Latin America investing in the US, but not vice versa. Diversifying equities across Latin American markets was beneficial for US investors but not so for Latin American investors. The results support international diversification for risk reduction purposes but not as a means to increase returns.
