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

Jeffrey A. Frankel, Sergio L. Schmukler
1996 The Collapse of Exchange Rate Regimes  
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
more » ... fore 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.
doi:10.1007/978-1-4615-6289-4_6 fatcat:bqxeomq5dfd4plaomdojhfmq6i