Country Fund Discounts and the Mexican Crisis of December 1994: Did Local Residents Turn Pessimistic Before International Investors?

43 Pages Posted: 30 Oct 1996

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: September 1996

Abstract

It has been suggested that Mexican investors were the "front-runners" in the peso crisis of December 1994, turning pessimistic before international investors. Different expectations about their own economy, perhaps due to asymmetric information, prompted Mexican investors to be the first ones to leave the country. This paper investigates whether data from three Mexican country funds provide evidence that supports the "divergent expectations" hypothesis. We find that, right before the devaluation, Mexican country fund Net Asset Values (driven mainly by Mexican investors) dropped faster than their prices (driven mainly by foreign investors). Moreover, we find that Mexican NAVs tend to Granger-cause the country fund prices. This suggests that causality, in some sense, flows from the Mexico City investor community to the Wall Street investor community.

JEL Classification: F30, F34, G15

Suggested Citation

Frankel, Jeffrey A. and Schmukler, Sergio, Country Fund Discounts and the Mexican Crisis of December 1994: Did Local Residents Turn Pessimistic Before International Investors? (September 1996). FRB International Finance Discussion Paper No. 563. Available at SSRN: https://ssrn.com/abstract=7861 or http://dx.doi.org/10.2139/ssrn.7861

Jeffrey A. Frankel (Contact Author)

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

79 John F. Kennedy Street
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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
United States

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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