Exchange Rate Volatility in LATAM: Common and Idiosyncratic Factors.

This paper examines the volatility of the daily returns of the main Latin American currencies against the dollar (Brazil, Chile, Colombia, Mexico and Peru) over the last twenty years. Based on a simple Bayesian Stochastic Volatility framework, it is possible to identify the global synchronization factor of these currencies and distinguish it from the idiosyncratic component of each country. The global factor captured is highly correlated with popular volatility indicators, such as the VIX or the EPU of the US. We also find that the proportion of volatility explained by the global factor is significantly higher than that of the idiosyncratic component. Likewise, idiosyncratic volatility is much lower in the case of Peru compared to its peers in the region, with Brazil being the country with the most volatile component. Naturally, the characteristics of each market, credibility and confidence in the national currency, plus political uncertainty, and the exchange rate intervention of the central bank, play an important role in determining such volatilities.