Country fund discounts and the Mexican crisis of December 1994: did local residents turn pessimistic before international investors?

Jeffrey Frankel and Sergio Schmukler

No 563, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

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 country fund Net Asset Values (driven mainly by Mexican investors) dropped faster than their prices (driven mainly 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.

Keywords: Mexico; Investments; Financial crises - Mexico (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (19)

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Journal Article: Country fund discounts and the mexican crisis of December 1994: Did local residents turn pessimistic before international investors? (1996)
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