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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.
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