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

Mexican investors turned pessimistic before international investors, as they were the front-runners in the peso crisis of December 1994. This paper examines data from three Mexican country funds providing evidence that supports the different expectations theory. The authors find that right before the devaluation, Mexican country fund Net Asset Values (NAV) by Mexican investors dropped faster than prices by foreign investors. During 1994, data showed that the pressure on Mexico's foreign exchange reserves just prior to the devaluation came from Mexican residents, not from the flight of foreign investors. This working paper can be found at the US Federal Reserve Board's International Finance Discussion Papers. You can access this by going to <http://www.federalreserve.gov/pubs/workingpapers.htm>