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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 fund Net Asset Values
(mainly driven by Mexican investors) dropped first and/or faster than Mexican country fund
prices (mainly driven 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. More
generally, the paper proposes an approach that differs from the existing explanations of
country fund discounts. It suggests that different expectations, perhaps arising from
asymmetric information, may help to explain the observed behavior of country fund discounts
in partially segmented markets.