A substantial body of evidence documents the relationship between macroeconomic variables and stock returns and risk from developed countries. The evidence for emerging markets is limited, particularly identifying risk premia compensations for inflation and exchange rates. This paper attempts to quantify the short and long term relationship between inflation and exchange rates with over all stock market performance for the case of the two largest Latin American capital markets, Mexico and Brazil. Extending the Fisher model, the aim is to determine whether or not these markets have failed to keep pace with movements in those two variables (the most unstable and economic growth hampering variables in these economies during the last three decades), and therefore to what extent the stock market succeeds or fails to test as inflation hedges. The empirical evidence is presented assuming positioning of a local investor in their own market, and from the point of view of a U.S. investor in each of these markets. Two unit root tests are also presented to stress long term relationships between stock returns, inflation, and foreign exchange.

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In efficient markets current prices reflect all available information. Past prices do not contain any useful information for predicting future prices or for realizing extraordinary gains. This principle, known as the weak hypothesis of informational market efficiency, has been incorporated into Purchasing Power Parity (PPP) theory to overcome its limitations in Résumé Dans des marchés efficients, les prix courants reflètent toute l'information disponible. Les prix du passé ne contiennent aucune information utile pour prédire les futurs prix ni pour obtenir des bénéfices extraordinaires. Ce principe, hypothèse faible de l'efficience informationnelle des marchés, a été incorporé à la théorie de la parité du pouvoir d'achat (PPA), afin de surmonter ses limitations dans l'analyse inter-temporelle de l'ajustement des taux de change aux tendances inflationnistes. En général, les études sur les marchés de devises des pays développés valident son efficience. L'investigation en ce qui concerne les nations en voie