Financial Fragility and Mexico's 1994 Peso Crisis: An Event-Window Analysis of Market-Valuation Effects

Posted: 9 Jun 2000

See all articles by Berry K. Wilson

Berry K. Wilson

Pace University - Department of Finance and Economics

Anthony Saunders

New York University - Leonard N. Stern School of Business

Gerard Caprio

Williams College

Abstract

Persistent cycles of devaluation, debt repudiation, and financial crisis have been recurrent themes in Latin America and elsewhere. This study focuses on one such event, namely, the Mexican peso devaluation, debt, and financial-sector crisis of 1994-95. This paper utilizes an event-study framework, with daily stock market data, to document financial market responses to the unfolding crisis. In particular, we find that the devaluation itself was viewed as relatively benighn by market participants. The results also show little evidence that investors anticipated the peso devaluation, the declining reserve levels of Mexico's central bank, and the increasing sovereign default risk of Mexico. However, the results suggest that the equity markets did respond positively to remedial actions taken by governmental authorities, such as the Clinton bailout plan.

JEL Classification: F31

Suggested Citation

Wilson, Berry K. and Saunders, Anthony and Caprio, Gerard, Financial Fragility and Mexico's 1994 Peso Crisis: An Event-Window Analysis of Market-Valuation Effects. Journal of Money, Credit and Banking, Vol. 32, No. 3, Part II, August 2000. Available at SSRN: https://ssrn.com/abstract=227849

Berry K. Wilson

Pace University - Department of Finance and Economics ( email )

Lubin School of Business
New York, NY 10038
United States

Anthony Saunders (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Gerard Caprio

Williams College ( email )

Williamstown, MA 01267
United States
413-597-2465 (Phone)
413-597-4045 (Fax)

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