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Financial fragility and Mexico's 1994 peso crisis: an event-window analysis of market-valuation effects

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  • Gerard Caprio
  • Anthony Saunders
  • Berry Wilson

Abstract

Persistent cycles of devaluation, debt repudiation, and financial crisis have been recurrent themes in Latin America and elsewhere. This study focuses on one such event, namely, the Mexican peso devaluation, debt, and financial-sector crisis of 1994-95. This paper utilizes an event-study framework, with daily stock market data, to document financial market responses to the unfolding crisis. In particular, we find that the devaluation itself was viewed as relatively benign by market participants. The results also show little evidence that investors anticipated the peso devaluation, the declining reserve levels of Mexico's central bank, and the increasing sovereign default risk of Mexico. However, the results suggest that the equity markets did respond positively to remedial actions taken by governmental authorities, such as the Clinton bailout plan.
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Suggested Citation

  • Gerard Caprio & Anthony Saunders & Berry Wilson, 2000. "Financial fragility and Mexico's 1994 peso crisis: an event-window analysis of market-valuation effects," Proceedings, Federal Reserve Bank of Cleveland, pages 450-473.
    • Handle: RePEc:fip:fedcpr:y:2000:p:450-473
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    Cited by:

    1. Gerard Caprio & Patrick Honohan, 2008. "Banking Crises," Center for Development Economics 2008-09, Department of Economics, Williams College.
    2. Hazera, Alejandro & Hernández, Salvador Marín & Stevens, Kevin T. & Cárdenas, Eliecer Campos & Schwarzbach, Henry, 2011. "Assessing the effectiveness of financial reporting harmonization for emerging market banks: The case of Banco Serfin," Research in Accounting Regulation, Elsevier, vol. 23(1), pages 1-19.
    3. Humberto Valencia-Herrera & Francisco López-Herrera, 2018. "Markov Switching International Capital Asset Pricing Model, an Emerging Market Case: Mexico," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(1), pages 96-129, April.
    4. Abuelfadl, Moustafa & Yamani, Ehab, 2021. "Currency news and international bond markets," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    5. Drakos, Konstantinos, 2004. "Terrorism-induced structural shifts in financial risk: airline stocks in the aftermath of the September 11th terror attacks," European Journal of Political Economy, Elsevier, vol. 20(2), pages 435-446, June.
    6. Hu, Yang & Oxley, Les, 2017. "Are there bubbles in exchange rates? Some new evidence from G10 and emerging market economies," Economic Modelling, Elsevier, vol. 64(C), pages 419-442.
    7. Haque, Mahfuzul & Varela, Oscar & Hassan, M. Kabir, 2007. "Safety-first and extreme value bilateral U.S.-Mexican portfolio optimization around the peso crisis and NAFTA in 1994," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(3), pages 449-469, July.
    8. Wilson, Berry & Saunders, Anthony, 2004. "Monetary secrecy and selective disclosure: The emerging market case of Mexico's monetary reporting," Review of Financial Economics, Elsevier, vol. 13(1-2), pages 199-210.
    9. Yang Hu & Les Oxley, 2016. "Are there Bubbles in Exchange Rates? Some New Evidence from G10 and Emerging Markets Countries," Working Papers in Economics 16/05, University of Waikato.
    10. Patro, Dilip K. & Wald, John K. & Wu, Yangru, 2014. "Currency devaluation and stock market response: An empirical analysis," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 79-94.

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