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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

Suggested Citation

  • 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.
  • Handle: RePEc:kap:openec:v:7:y:1996:i:1:p:511-534
    DOI: 10.1007/BF01886211
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    More about this item

    Keywords

    country fund; crisis; emerging markets; equities; expectations; asymmetric; divergent; heterogeneous; Mexico; peso; F30; F34; G15;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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