Recent Turmoil in Emerging Markets and the Behavior of Country-Fund Discounts: Renewing the Puzzle of the Pricing of Closed-End Mutual Funds
Summary:
This paper argues that recent movements in closed-end emerging markets funds present a strong challenge to the leading explanations of the behavior of closed-end country fund prices. In particular, closed-end funds dedicated to Mexico and other Latin American stock markets developed large premia after the December 1994 devaluation of the Mexican peso and the subsequent financial crisis. The so-called “investor sentiment hypothesis” could explain these events only by suggesting that investors became very optimistic about emerging markets stocks, and especially Mexican stocks; this possibility seems unlikely given the facts surrounding the devaluation. We argue instead that a sensible explanation for recent dynamics of closed-end country funds is that investors in these funds are loss-averse, implying that they do not want to realize paper losses on their closed-end fund shares. This works to put a drag on the downward movement in closed-end fund prices.
Series:
Working Paper No. 1995/068
Subject:
Emerging and frontier financial markets Financial institutions Financial markets Mutual funds Securities Stock markets Stocks
English
Publication Date:
July 1, 1995
ISBN/ISSN:
9781451848953/1018-5941
Stock No:
WPIEA0681995
Pages:
30
Please address any questions about this title to publications@imf.org