Recent Turmoil in Emerging Markets and the Behavior of Country-Fund Discounts: Renewing the Puzzle of the Pricing of Closed-End Mutual Funds

By Charles Frederick Kramer, T. Todd Smith

July 1, 1995

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Charles Frederick Kramer, and T. Todd Smith Recent Turmoil in Emerging Markets and the Behavior of Country-Fund Discounts: Renewing the Puzzle of the Pricing of Closed-End Mutual Funds, (USA: International Monetary Fund, 1995) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: Emerging and frontier financial markets, Financial institutions, Financial markets, Mutual funds, Securities, Stock markets, Stocks

Keywords: Closed-end fund, Country fund discount, Country fund price, Country funds, Discount, Emerging and frontier financial markets, Fund, Fund share, Mexico fund, Mutual funds, Securities, Share price, Stock markets, Stocks, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1995/068
Stock No:

WPIEA0681995
ISBN:

9781451848953
ISSN:

1018-5941

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