Recent Turmoil in Emerging Markets and the Behavior of Country-Fund Discounts [electronic resource] : Renewing the Puzzle of the Pricing of Closed-End Mutual Funds / Charles Frederick Kramer.

By: Kramer, Charles FrederickContributor(s): Smith, T. ToddMaterial type: TextTextSeries: IMF Working Papers; Working Paper ; No. 95/68Publication details: Washington, D.C. : International Monetary Fund, 1995Description: 1 online resource (30 p.)ISBN: 1451848951 :ISSN: 1018-5941Subject(s): Initial Public offerings | Institutional Investors | Investors | Paper | MexicoAdditional physical formats: Print Version:: Recent Turmoil in Emerging Markets and the Behavior of Country-Fund Discounts : Renewing the Puzzle of the Pricing of Closed-End Mutual FundsOnline resources: IMF e-Library | IMF Book Store Abstract: 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.
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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.

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