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Devaluation Expectations and the Stock Market: The Case of Mexico in 1994/95

Torbjorn Becker, Anthony Richards and R. Gaston Gelos

No 2000/028, IMF Working Papers from International Monetary Fund

Abstract: Using company-level data, this paper examines the relative stock-market performance of firms with different foreign-exchange exposures around the time of the 1994/95 Mexican crisis. Contrary to what one might have expected given the alleged peso overvaluation, exporting firms outperformed the market beginning in late 1993. Although interest rates fail to show a clear confidence loss in the exchange rate regime, the relative performance of net exporters suggests that expectations of devaluation increased continuously. The methodology presented is relevant beyond the Mexican case: sectoral differences in stock market performance may constitute valuable leading indicators of exchange rate changes in emerging markets.

Keywords: WP; exchange rate; abnormal returns; devaluation; devaluation expectation; Stock market; Mexican peso devaluations; event study; exchange rate exposure; credibility of exchange rate regimes; leading crisis indicators; devaluation event-study methodology; exchange rate factor; shadow exchange rate; exchange rate elasticity; Exchange rates; Stock markets; Exchange rate adjustments; Exchange rate arrangements; Exports; Asia and Pacific (search for similar items in EconPapers)
Pages: 42
Date: 2000-01-01
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Handle: RePEc:imf:imfwpa:2000/028