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Country funds and asymmetric information

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Author Info
Frankel, Jeffrey A.
Schmukler, Sergio L.

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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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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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dennis P J Botman & Cees G H Diks, 2002. "Location of Investors and Capital Flight," Tinbergen Institute Discussion Papers 02-013/1, Tinbergen Institute. [Downloadable!]
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  2. Daryl Collins & Shãna Gavron, 2004. "Channels of financial market contagion," Applied Economics, Taylor and Francis Journals, vol. 36(21), pages 2461-2469, December. [Downloadable!] (restricted)
  3. Radovan Vadovic, 2009. "Early, Late, and Multiple Bidding in Internet Auctions," Working Papers 0904, Centro de Investigacion Economica, ITAM. [Downloadable!]
  4. Graciela L. Kaminsky & Sergio L. Schmukler, 1999. "What triggers market jitters: a chronicle of the Asian crisis," International Finance Discussion Papers 634, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  5. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2006. "International financial integration through the law of one price," Policy Research Working Paper Series 3897, The World Bank. [Downloadable!]
    Other versions:
  6. Woochan Kim & Shang-Jin Wei, 1999. "Offshore Investment Funds: Monsters in Emerging Markets?," NBER Working Papers 7133, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Kenneth A. Froot & Tarun Ramadorai, 2001. "The Information Content of International Portfolio Flows," NBER Working Papers 8472, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Kaufmann, Daniel & Mehrez, Gil & Schmukler, Sergio, 1999. "Predicting currency fluctuations and crises - do resident firms have an informational advantage?," Policy Research Working Paper Series 2259, The World Bank. [Downloadable!]
    Other versions:
  9. Marina Halac & Sergio Schmukler, 2003. "Distributional effects of crises : the role of financial transfers," Policy Research Working Paper Series 3173, The World Bank. [Downloadable!]
  10. Frankel, Jeffrey A. & Schmukler, Sergio L., 1998. "Country funds and asymmetric information," Policy Research Working Paper Series 1886, The World Bank. [Downloadable!]
    Other versions:
  11. Sandra Lizarazo, 2009. "Contagion of Financial Crises in Sovereing Debt Markets," Working Papers 0907, Centro de Investigacion Economica, ITAM. [Downloadable!]
  12. Fernando Broner, 2003. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," Economics Working Papers 839, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2007. [Downloadable!]
    Other versions:
  13. Jeffrey Frankel & Sergio Schmukler, 1996. "Country fund discounts and the mexican crisis of December 1994: Did local residents turn pessimistic before international investors?," Open Economies Review, Springer, vol. 7(1), pages 511-534, March. [Downloadable!] (restricted)
    Other versions:
  14. 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. [Downloadable!] (restricted)
    Other versions:
  15. Kaminsky, Graciela & Lyons, Richard & Schmukler, Sergio, 2001. "Mutual fund investment in emerging markets - an overview," Policy Research Working Paper Series 2529, The World Bank. [Downloadable!]
  16. Daryl Collins & Shãna Gavron, 2005. "Measuring equity market contagion in multiple financial events," Applied Financial Economics, Taylor and Francis Journals, vol. 15(8), pages 531-538, May. [Downloadable!] (restricted)
  17. Marcelo Pinheiro, 2005. "Informational asymmetries and a multiplier effect on price correlation and trading," Annals of Finance, Springer, vol. 1(4), pages 395-421, October. [Downloadable!] (restricted)
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