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Country funds and asymmetric information

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  • Frankel, Jeffrey A.
  • Schmukler, Sergio L.

Abstract

Using data on country funds, the authors study how differential access to information affects international investment. They find that past changes in net asset values (NAVs) and discounts predict current country fund prices more commonly than prices and discounts predict NAVs. The price (NAV) adjustment coefficients are low and negatively correlated with the local (foreign) market variability -- but not with the fund price (NAV) variability. NAVs seem to be closer to local information. They are the asset prices that react first to local news. Later the country fund holders receive the information and those prices react after NAVs have reacted. The 1995Mexican crisis and the 1997 Asian crisis are two examples of this type of behavior. These findings are consistent with the hypothesis of asymmetric information, according to which the holders of the underlying assets have more information about local assets than the country fund holders do. The authors empirically test the asymmetric information hypothesis against the noise traders hypothesis. A theoretical model is presented in the appendix.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1886.

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Date of creation: 28 Feb 1998
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Handle: RePEc:wbk:wbrwps:1886

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Keywords: International Terrorism&Counterterrorism; Financial Intermediation; Payment Systems&Infrastructure; Economic Theory&Research; Environmental Economics&Policies; Economic Theory&Research; Financial Intermediation; Payment Systems&Infrastructure; Insurance Law; Environmental Economics&Policies;

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