Dynamic correlations of equity market and economic policy uncertainty in South America

Abstract

This study examines the dynamic relationship between economic policy uncertainty (EPU) and equity markets in Brazil, Chile, and Argentina within the context of presidential elections and political episodes from 2010 to 2025. While the literature establishes a negative correlation between policy uncertainty and equity returns, it relies on low-frequency data that cannot capture the immediate market response to high-stakes political episodes. The dynamic conditional correlation (DCC)-generalized autoregressive conditional heteroscedasticity model was used to estimate time-varying correlations between 5-year credit default swap (CDS) spreads and equity indices. To address endogeneity, two-stage least squares was used to examine how presidential elections and political episodes affect these correlations. The Argentine sample is shorter (July 2023 to August 2025) due to data availability for that country. High-frequency analysis revealed a persistent negative co-movement between EPU and equity markets across all three countries. Electoral episodes and social commotions generate statistically significant shifts in DCCs, with the intensity and persistence of these effects varying across institutional contexts. This study documents that abrupt shifts in the uncertainty-equity correlation during political episodes are detectable at daily frequency but absent from monthly analyses. The heterogeneous pattern of responses across Brazil, Chile, and Argentina advances understanding of how institutional fragility and macroeconomic conditions affect the transmission of political risk to financial markets. The study supports investors, risk managers, and regulators in emerging economies by offering a high-frequency framework for monitoring political risk. The findings provide a market-sensitive basis for portfolio management and regulatory oversight during electoral cycles and episodes of institutional instability. This study introduces a high-frequency methodological framework by employing fluctuations as a dynamic proxy for EPU, shifting the analysis from traditional low-frequency indices to a market-based metric capable of capturing real-time volatility. The findings expand the research field of political risk measurement in equity markets and provide practitioners with a more responsive tool for estimating the effects of political shocks.