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Country Fund Discounts, Asymmetric Information and the Mexican Crisis of 1994: Did Local Residents Turn Pessimistic Before International Investors?

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  • Jeffrey A. Frankel
  • Sergio L. 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 uses data from three Mexican country funds to investigate the hypothesis of divergent expectations. We find that, right before the devaluation, Mexican fund Net Asset Values (mainly driven by Mexican investors) dropped 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. More generally, the paper proposes an asymmetric information approach that differs from the existing explanations of country fund discounts.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5714.

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Date of creation: Aug 1996
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Handle: RePEc:nbr:nberwo:5714

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Cited by:
  1. Richard Portes and Hélène Rey., 2000. "The Determinants of Cross-Border Equity Flows: The Geography of Information," Center for International and Development Economics Research (CIDER) Working Papers C00-111, University of California at Berkeley.
  2. Richard Portes & Helene Rey, 1999. "The Determinants of Cross-Border Equity Flows," NBER Working Papers 7336, National Bureau of Economic Research, Inc.
  3. Emna Trabelsi, 2011. "Does asymmetric information play a role in explaining the Asian crisis? Application to Indonesian and Malaysian cases using a two-state Markov Switching model," Economics Bulletin, AccessEcon, vol. 31(1), pages 560-571.
  4. Sandra Lizarazo, 2009. "Default Risk and Risk Averse International Investors," Working Papers 0907, Centro de Investigacion Economica, ITAM.
  5. Cormac Ó Gráda & Eugene N White, 2002. "Who Panics during Panics? Evidence from a Nineteenth Century Bank," Working Papers 200212, School Of Economics, University College Dublin.
  6. Radovan Vadovic, 2009. "Early, Late, and Multiple Bidding in Internet Auctions," Working Papers 0904, Centro de Investigacion Economica, ITAM.
  7. Richard Portes & =20 H=E9l=E8ne Rey, 2001. "The Determinants of Cross-Border Equity Flows: The Geography of=20 Information," International Finance 0012002, EconWPA.

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