Abstract
This paper employs a conditional version of the International Capital Asset Pricing Model (ICAPM) to investigate the determinants of regional integration of stock markets in the Latin America over the period 1996-2008. This model allows for three sources of time-varying risks: common regional market risk, exchange rate risk and local market risk. In particular, exchange rate risk exposure is not only measured by bilateral exchange rates against the US dollar as in previous studies, but also by the real effective exchange rate index. At the empirical level, we make use of the asymmetric multivariate DCC-GARCH of Engle and Sheppard (2006) process to simultaneously estimate the ICAPM for four major Latin American emerging countries (Argentina, Brazil, Chile and Mexico). Our findings show that the degrees of trade openness and stock market development are among themost important drivers of regional integration in the Latin America context whatever the measure of the exchange rate risk.