Pessimistic Foreign Investors and Turmoil in Emerging Markets: The Case of Brazil in 2002

21 Pages Posted: 6 Jan 2012 Last revised: 28 Jun 2014

Sandro C. Andrade

University of Miami - Department of Finance

Emanuel Kohlscheen

Bank for International Settlements (BIS)

Date Written: June 2014

Abstract

Using surveys of foreign exchange expectations, we document the emergence of a large gap between the beliefs of foreign banks and local-based institutions ahead of Brazil's 2002 presidential elections. That period was marked by a sudden stop in foreign capital flows and steep depreciation of Brazilian financial assets. While foreigners have their beliefs "marked to the market", locals forecasted a strong market rebound. The belief gap closed soon after the elections, as the president-elect reaffirmed the continuity of macroeconomic policy and markets rebounded, as locals had predicted. Trading data in Brazilian stock exchange are consistent with survey evidence. Our analysis supports the view that emerging market financial crises may be precipitated by non-structural reasons such as information frictions affecting foreign investors.

Keywords: self-fulfilling crises, sudden stop, capital flows, elections

JEL Classification: F31, F32, F34, G14, G15

Suggested Citation

Andrade, Sandro C. and Kohlscheen, Emanuel, Pessimistic Foreign Investors and Turmoil in Emerging Markets: The Case of Brazil in 2002 (June 2014). Available at SSRN: https://ssrn.com/abstract=1980213 or http://dx.doi.org/10.2139/ssrn.1980213

Sandro C. Andrade (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://moya.bus.miami.edu/~sandrade/

Emanuel Kohlscheen

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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