Country Funds and Asymmetric Information

38 Pages Posted: 20 Apr 2016

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Date Written: December 1997

Abstract

Data on country funds support the hypothesis of asymmetric information: that the holders of underlying assets have more information about local assets than the country fund holders do.

Using data on country funds, Frankel and Schmukler study how differential access to information affects international investment.

They find that past changes in net asset values (NAVs) and discounts predict current country fund prices more commonly than prices and discounts predict NAVs. The price (NAV) adjustment coefficients are low and negatively correlated with the local (foreign) market variability-but not with the fund price (NAV) variability.

NAVs seem to be closer to local information. They are the asset prices that react first to local news. Later the country fund holders receive the information and those prices react after NAVs have reacted. The 1995 Mexican crisis and the 1997 Asian crisis are two examples of this type of behavior.

These findings are consistent with the hypothesis of asymmetric information, according to which the holders of the underlying assets have more information about local assets than the country fund holders do. Frankel and Schmukler empirically test the asymmetric information hypothesis against the noise traders hypothesis. A theoretical model is presented in the appendix.

This paper-a product of Macro-economics and Growth, Development Research Group-is part of a larger effort in the group to understand how international financial markets work.

Suggested Citation

Frankel, Jeffrey A. and Schmukler, Sergio, Country Funds and Asymmetric Information (December 1997). World Bank Policy Research Working Paper Series, No. 1886. Available at SSRN: https://ssrn.com/abstract=569219

Jeffrey A. Frankel (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Mailbox 22
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617-496-3834 (Phone)
617-496-5747 (Fax)

HOME PAGE: http://www.ksg.harvard.edu/fs/jfrankel

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Sergio Schmukler

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

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