Country Fund Discounts, Asymmetric Information and the Mexican Crisis of 1994: Did Local Residents Turn Pessimistic Before International Investors?
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. More generally, the paper proposes an approach that differs from the existing explanations of country fund discounts. It suggests that different expectations, perhaps arising from asymmetric information, may help to explain the observed behavior of country fund discounts in partially segmented markets.Download Info
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Paper provided by University of California at Berkeley in its series Center for International and Development Economics Research (CIDER) Working Papers with number C96-067.Length:
Date of creation: 01 Jun 1996
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Handle: RePEc:ucb:calbcd:c96-067
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- Jeffrey A. Frankel & Sergio L. Schmukler, 1996. "Country Fund Discounts, Asymmetric Information and the Mexican Crisis of 1994: Did Local Residents Turn Pessimistic Before International Investors?," NBER Working Papers 5714, National Bureau of Economic Research, Inc.
- F30 - International Economics - - International Finance - - - General
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
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