Abstract:

Empirical examination of volatility, time varying risk premium and persistence of shocks to volatility of the Mexico stock market using MSCI daily country index in both U$ and MP from 1988-2009 is performed in this study. Its focus is on the Mexican Peso Crisis of 1994 in order to depict the altering behavior of volatility and examine the market characteristics. On assessing the performance of the pre crisis period (1988-1994) with the post crisis period (1995-2009), it can be concluded that the characteristics of the market during pre crises (volatility, persistence of volatility and time varying risk premium) are similar as those in the post crises period. However the annualized mean both in U$ and MP has gone down considerably, but the variance increased following the 1994 crisis. The time varying risk premium during the pre crisis period between the foreign and domestic investors is insignificant, but has changed significantly in the post crises period, while the time varying risk premium in MP almost double compared to U$, implying domestic investors' comparative risk reward payoff is better than the foreign investors in the post crises period.