Country Fund Discounts, Asymmetric Information and the Mexican Crisis of 1994: Did Local Residents Turn Pessimistic Before International Investors?

Jeffrey Alexander Frankel () and Sergio Schmukler ()

No 5714, NBER Working Papers from National Bureau of Economic Research, Inc

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 uses data from three Mexican country funds to investigate the hypothesis of divergent expectations. We find that, right before the devaluation, Mexican fund Net Asset Values (mainly driven by Mexican investors) dropped 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 asymmetric information approach that differs from the existing explanations of country fund discounts.

JEL-codes: F30 G15 (search for similar items in EconPapers)
Date: Written 1996-08
Note: AP IFM
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Published as Revised as "LS EMU More Justifiable Ex Post Than Ex Anye?" European Economic Review, 1997. Open Economic Review 7 (Fall 1996): 511-534. Reprinted in Currency Crashes: Causes, Consequences, and Policy Responses, Tavlas, George, ed., Kluwer, 1997, pp. 81-104.

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Working Paper: Country Fund Discounts, Asymmetric Information and the Mexican Crisis of 1994: Did Local Residents Turn Pessimistic Before International Investors? (1996)
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