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The Mexican Crisis and the Behavior of Country-Fund Discounts: Renewing the Puzzle of Closed-End Fund Pricing

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  • Charles Kramer

    (Capital Markets and Financial Studies Division, Research Department, International Monetary Fund, Room IS 12-802, 700, 19th Street, Washington, DC 20431, USA)

  • R. Todd Smith

    (Department of Economics, 8-14 Tory Building, University of Alberta, Edmonton, Alberta, T6G 2H4, Canada)

Abstract

Many studies have attempted to reconcile the behavior of closed-end fund prices with notions about the behavior of investors. Such studies have appealed to frictions (taxes, agency costs, and illiquidity) and investor sentiment to explain the puzzling behavior of fund prices. The events of December 1994 in Mexico, and subsequent effects on some funds' prices, have given rise to a new puzzle, extreme premia on closed-end funds that invest in Mexican stocks. We believe this new puzzle is not amenable to explanation by extant hypotheses. We offer a hypothesis of loss-aversion on the part of individual investors as a possible explanation, and outline the relevant effects that loss-aversion should have on fund discounts.

Suggested Citation

  • Charles Kramer & R. Todd Smith, 1998. "The Mexican Crisis and the Behavior of Country-Fund Discounts: Renewing the Puzzle of Closed-End Fund Pricing," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 1(01), pages 161-174.
    • Handle: RePEc:wsi:ijtafx:v:01:y:1998:i:01:n:s0219024998000084
    DOI: 10.1142/S0219024998000084
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    Cited by:

    1. Samuel Kyle Jones & Michael Stroup, 2010. "Closed-end country fund premiums and economic freedom," Applied Financial Economics, Taylor & Francis Journals, vol. 20(21), pages 1639-1649.
    2. Hughen, J. Christopher & Mathew, Prem G., 2009. "The efficiency of international information flow: Evidence from the ETF and CEF prices," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 40-49, March.
    3. Chandar, Nandini & Patro, Dilip Kumar, 2000. "Why do closed-end country funds trade at enormous premiums during currency crises?," Pacific-Basin Finance Journal, Elsevier, vol. 8(2), pages 217-248, May.
    4. Samuel Jones & Michael Stroup, 2013. "Economic freedom and the mispricing of single-state municipal bond closed-end funds," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(2), pages 173-187, April.

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