Mexico's tequila crisis--hangover or hair of the dog? Country risk and exchange rate regimes

Multinational Business Review, Fall 2002 by Goldberg, Cathy S, Veitch, John M

CONCLUSION The World Capital Asset Pricing Model (CAPM) is a standard approach for estimating the risk of a country's financial markets with respect to a world market index. A large body of literature has established the importance of a country's economic and political variables in explaining cross-sectional variations in beta measures across countries.

Our paper has investigated the importance of economic factors in a time-varying beta model of country risk for Mexico, a developing economy with financial markets that have been integrated with world markets for at least the past decade. We find that exchange rate surprises are the main determinants of how Mexico's beta varies over the period 1990 2000. We also find that the type of exchange rate regime, managed rates versus floating rates, affects the influence of exchange rate surprises on Mexico's country risk. Mexico's beta trends lower over the managed rate period, 1990 1994, but shifts up and becomes more volatile in the floating rate period, 1995 - 1999.

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