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Recent Turmoil in Emerging Markets and the Behavior of Country-Fund Discounts; Renewing the Puzzle of the Pricing of Closed-End Mutual Funds

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  • Charles Frederick Kramer
  • T. Todd Smith

Abstract

This paper argues that recent movements in closed-end emerging markets funds present a strong challenge to the leading explanations of the behavior of closed-end country fund prices. In particular, closed-end funds dedicated to Mexico and other Latin American stock markets developed large premia after the December 1994 devaluation of the Mexican peso and the subsequent financial crisis. The so-called “investor sentiment hypothesis” could explain these events only by suggesting that investors became very optimistic about emerging markets stocks, and especially Mexican stocks; this possibility seems unlikely given the facts surrounding the devaluation. We argue instead that a sensible explanation for recent dynamics of closed-end country funds is that investors in these funds are loss-averse, implying that they do not want to realize paper losses on their closed-end fund shares. This works to put a drag on the downward movement in closed-end fund prices.

Suggested Citation

  • Charles Frederick Kramer & T. Todd Smith, 1995. "Recent Turmoil in Emerging Markets and the Behavior of Country-Fund Discounts; Renewing the Puzzle of the Pricing of Closed-End Mutual Funds," IMF Working Papers 95/68, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:95/68
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    Cited by:

    1. Cohen, Benjamin H. & Remolona, Eli M., 2008. "Information flows during the Asian crisis: Evidence from closed-end funds," Journal of International Money and Finance, Elsevier, vol. 27(4), pages 636-653, June.
    2. 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.
    3. Jeffrey A. Frankel and Sergio L. Shmukler., 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 C96-067, University of California at Berkeley.
    4. Bank for International Settlements, 2001. "Market liquidity: proceedings of a workshop held at the BIS," BIS Papers, Bank for International Settlements, number 02, November.

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