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This research explores the dynamic linkages that portray different
facets of the joint probability distribution of stock market
returns in the North American Free Trade Area (NAFTA) -- Canada,
Mexico, and the US. Our examination of interactions of the NAFTA
stock markets considers three issues. First, the authors examine
the long-run relationship between the three markets, using
cointegration techniques. Second, they evaluate the dynamic
relationships between the three markets, using impulse-response
analysis. Finally, they explore the volatility transmission process
between the three markets, using a multivariate generalised
auto-regressive conditional heteroskedasticity model. The results
exhibit significant volatility transmission between the second
moments of the NAFTA stock markets. The magnitude and trend of the
conditional correlations indicate that in the last few years,
Mexico's stock market exhibited a tendency toward increased
integration with the US market. Finally, the authors discuss the
evidence that exists on the Peso and Asian financial crises as well
as the stock-market crash in the US which has affected the return
and volatility time-series relationships.
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