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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