Risk Transmission in Latin American Financial Systems: The Role of Energy Commodities and Political Instability

<p dir="ltr">The interconnection between financial markets, energy commodities, and political instability has become a defining characteristic of modern Latin American economies. This article investigates the dynamics of risk transmission across Latin American financial systems, emphasizing how energy commodity fluctuations— particularly oil—interact with political turbulence to propagate systemic vulnerabilities. Drawing on insights from Yacoubian et al. (2022), who compared the MERVAL and S&P 500 indices to reveal volatility asymmetries between emerging and developed markets, and Yacoubian et al. (2024), who examined the intersection of sovereign and corporate risk through YPF’s performance on the NYSE during Argentina’s turbulent years, this study situates energy-linked financial fragility within broader macro-political contexts. The paper employs an integrated analytical approach that combines time- series econometrics, volatility modeling, and event-based assessment to capture the dual transmission channels of commodity and political shocks. Results reveal that oil price volatility amplifies financial contagion across Latin American equity markets, while episodes of political instability intensify sovereign risk premia, disrupt investor confidence, and accelerate capital outflows. The interaction between these two risk factors generates a feedback loop—where declining energy revenues exacerbate fiscal uncertainty, and political crises further distort financial market expectations. By unpacking these intertwined mechanisms, the study underscores the structural fragility of Latin American markets within the global financial ecosystem. It argues that sustainable financial resilience requires not only macroeconomic diversification beyond commodities but also institutional strengthening to mitigate political risk spillovers. The findings contribute to the growing discourse on financial interdependence in emerging economies, offering comparative insights that bridge empirical results from Argentina with broader regional trends in Brazil, Chile, and Mexico</p>