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

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.

Suggested Citation

  • Frankel, Jeffrey A. & Shmukler, Sergio L., 1996. "Country Fund Discounts, Asymmetric Information and the Mexican Crisis of 1994: Did Local Residents Turn Pessimistic Before International Investors?," Center for International and Development Economics Research (CIDER) Working Papers 233431, University of California-Berkeley, Department of Economics.
  • Handle: RePEc:ags:ucbewp:233431
    DOI: 10.22004/ag.econ.233431
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    Keywords

    International Development;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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