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Country funds and asymmetric information, Volume 1
 
Author:Frankel, Jeffrey A.; Schmukler, Sergio L.; Collection Title:Policy, Research working paper ; no. WPS 1886
Date Stored:1998/02/01Document Date:1998/02/28
Document Type:Policy Research Working PaperLanguage:English
Major Sector:FinanceReport Number:WPS1886
Sub Sectors:Other FinanceSubTopics:Environmental Economics & Policies; International Terrorism & Counterterrorism; Payment Systems & Infrastructure; Economic Theory & Research; Financial Intermediation; Insurance Law
Volume No:1  

Summary: Using data on country funds, the authors study how differential access to information affects international investment. They find that past changes in net asset values (NAVs) and discounts predict current country fund prices more commonly than prices and discounts predict NAVs. The price (NAV) adjustment coefficients are low and negatively correlated with the local (foreign) market variability -- but not with the fund price (NAV) variability. NAVs seem to be closer to local information. They are the asset prices that react first to local news. Later the country fund holders receive the information and those prices react after NAVs have reacted. The 1995 Mexican crisis and the 1997 Asian crisis are two examples of this type of behavior. These findings are consistent with the hypothesis of asymmetric information, according to which the holders of the underlying assets have more information about local assets than the country fund holders do. The authors empirically test the asymmetric information hypothesis against the noise traders hypothesis. A theoretical model is presented in the appendix.

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