Interdependence of NAFTA Capital Markets: A Minimum Variance Portfolio Approach

We estimate the long-run relationships among NAFTA capital market returns and then calculate the weights of a “time-varying minimum variance portfolio†that includes the Canadian, Mexican, and USA capital markets between March 2007 and March 2009, a period of intense turbulence in international markets. Our results suggest that the behavior of NAFTA market investors is not consistent with that of a theoretical “risk-averse†agent during periods of high uncertainty and may be either considered as irrational or attributed to a possible “home country biasâ€. This finding represents valuable information for portfolio managers and contributes to a better understanding of the nature of the markets in which they invest. It also has practical implications in the design of international portfolio investment policies.