THE EFFECT OF EXCHANGE RATE AND MONETARY POLICY CHANGES ON STOCK RETURNS IN MEXICO AFTER THE TEQUILA CRISIS

Abstract: Purpose: To address any effect in Mexico´s stock returns due to changes in exchange rate and monetary policy after an economic shock (crisis). Methodology: We used a framework based on the Vector Auto-Regression approach. Additionally, the Difference-in-Difference regression approach was employed in order to briefly generalize our results. Empirical foundation: The empirical data employed comes from the historical financial information of the selected macroeconomic variables. This information was collected from Thomson-Reuters Data-stream database which was available at the Finance Society of Lund University. Findings: We found that the selected exchange rate and monetary policy variables significantly affected Mexico´s stock returns after the Tequila crisis. In addition we also confirmed the presence of a structural break-point in stock returns (which was our hypothesis).