Do Domestic Sentiment and the Spillover of US Investor Sentiment Impact Mexican Stock Market Returns?

We examine the relationship between sentiment and Mexican stock market returns. Results suggest a positive dynamic relationship between rational Mexican sentiment and equity market returns. Results also reveal a spillover of US sentiment on the return-generating process of the Mexican stock market that is distinct from domestic sentiment. This effect may be attributed to close economic ties and ease of capital flows between the two countries. Additionally, we find that rational sentiment and market returns are inversely related to the Peso/US dollar exchange rate. Our findings suggest that sentiment is a significant risk factor in the Mexican stock market.