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

Charles Kramer and T. Smith

No 1995/068, IMF Working Papers from International Monetary Fund

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.

Keywords: WP; fund; country funds; discount; fund share; country fund discount; Mexico fund; closed-end fund; country fund price; share price; Emerging and frontier financial markets; Stocks; Mutual funds; Stock markets; Securities (search for similar items in EconPapers)
Pages: 30
Date: 1995-07-01
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Citations: View citations in EconPapers (7)

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