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Country fund discounts and the mexican crisis of December 1994: Did local residents turn pessimistic before international investors?

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  • Jeffrey Frankel

    ()

  • Sergio Schmukler

    ()

Abstract

It has been suggested that Mexican investors were the “front-runners†in the peso crisis of December 1994, turning pessimistic before international investors. Different expectations about their own economy, perhaps due to asymmetric information, prompted Mexican investors to be the first ones to leave the country. This paper investigates whether data from three Mexican country funds provide evidence that supports the “divergent expectations†hypothesis. We find that, right before the devaluation, Mexican fund Net Asset Values (mainly driven by Mexican investors) dropped first and/or faster than Mexican country fund prices (mainly driven by foreign investors). Moreover, we find that Mexican NAVs tend to Granger-cause the country fund prices. This suggests that causality, in some sense, flows from the Mexico City investor community to the Wall Street investor community. Copyright Kluwer Academic Publishers 1996

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 7 (1996)
Issue (Month): 1 (March)
Pages: 511-534
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Handle: RePEc:kap:openec:v:7:y:1996:i:1:p:511-534

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Related research

Keywords: country fund; crisis; emerging markets; equities; expectations; asymmetric; divergent; heterogeneous; Mexico; peso; F30; F34; G15;

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References

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  1. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
  2. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, vol. 55(2), pages 439-463, April.
  3. Frankel, Jeffrey A. & Schmukler, Sergio L., 1997. "Country Funds and Asymmetric Information," Center for International and Development Economics Research, Working Paper Series qt2791c3wm, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  4. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  5. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. " Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
  6. Gikas Hardouvelis & Rafael La Porta & Thierry A. Wizman, 1994. "What Moves the Discount on Country Equity Funds?," NBER Chapters, in: The Internationalization of Equity Markets, pages 345-403 National Bureau of Economic Research, Inc.
  7. Jeffrey A. Frankel, 1994. "The Internationalization of Equity Markets," NBER Working Papers 4590, National Bureau of Economic Research, Inc.
  8. Jeffrey A. Frankel., 1993. "Sterilization of Money Inflows: Difficult (Calvo) or Easy (Reisen)?," Center for International and Development Economics Research (CIDER) Working Papers C93-024, University of California at Berkeley.
  9. Fernandez-Arias, Eduardo & DEC, 1994. "The new wave of private capital inflows : push or pull?," Policy Research Working Paper Series 1312, The World Bank.
  10. Michael P. Dooley & Eduardo Fernandez-Arias & Kenneth M. Kletzer, 1994. "Recent Private Capital Inflows to Developing Countries: Is the Debt Crisis History?," NBER Working Papers 4792, National Bureau of Economic Research, Inc.
  11. Adam Bennett & María Vicenta Carkovic S. & Susan Schadler & Robert Brandon Kahn, 1993. "Recent Experiences with Surges in Capital Inflows," IMF Occasional Papers 108, International Monetary Fund.
  12. Charles Frederick Kramer & T. Todd Smith, 1995. "Recent Turmoil in Emerging Markets and the Behavior of Country-Fund Discounts: Renewing the Puzzle of the Pricing of Closed-End Mutual Funds," IMF Working Papers 95/68, International Monetary Fund.
  13. Claessens, S. & Gooptu, S., 1993. "Portfolio Investment in Developing Countries," World Bank - Discussion Papers 228, World Bank.
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Citations

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Cited by:
  1. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  2. Antonio David, 2005. "Do controls on capital inflows insulate domestic variables against external shocks?," Money Macro and Finance (MMF) Research Group Conference 2005 9, Money Macro and Finance Research Group.
  3. Sandro C. Andrade & Emanuel Kohlscheen, 2010. "Pessimistic Foreign Investors and Turmoil in Emerging Markets: the case of Brazil in 2002," Working Papers Series 211, Central Bank of Brazil, Research Department.
  4. David, Antonio C., 2007. "Controls on capital inflows and external shocks," Policy Research Working Paper Series 4176, The World Bank.
  5. Sakho, Yaye Seynabou, 2006. "Contagion and firms'internationalization in Latin America : evidence from Mexico, Brazil, and Chile," Policy Research Working Paper Series 4076, The World Bank.

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