Crises, Contagion, and the Closed: End Country Fund Puzzle

IMF Working Papers, September 1, 1998

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Crises, Contagion, and the Closed: End Country Fund Puzzle

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Bibliographic details

• Authors: Eduardo Levy Yeyati, Angel J. Ubide
• Published: September 1, 1998
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451856316.001

Summary

• Authors: Eduardo Levy Yeyati, Angel J. Ubide
• Date: September 1, 1998
• Core result: The ratio of fund prices to their fundamental value increases dramatically during a crisis, an anomaly denoted the “closed-end country fund puzzle.”
• Scope: Analysis of closed-end country fund discounts with evidence from the Mexican and East Asian crises.
• Key implication: International investors are less (more) sensitive to changes in local (global) market conditions than domestic investors; this asymmetry means foreign participation in local markets can both help dampen a crisis in the originating country and amplify contagion to noncrisis countries.

Main findings

• The ratio of fund prices to fundamental value increases dramatically during a crisis; this phenomenon is labeled the “closed-end country fund puzzle.”
• The puzzle is directly related to differing sensitivities:
  • International investors are less sensitive to changes in local market conditions than domestic investors.
  • International investors are more sensitive to changes in global market conditions than domestic investors.
• The asymmetry in investor sensitivities implies:
  • Foreign participation can dampen a crisis in the originating country.
  • Foreign participation can amplify contagion to noncrisis countries.

Mechanism and interpretation

• Behavior observed in closed-end country fund discounts during crises links to investor composition and informational/behavioral differences between domestic and international investors.
• The differential sensitivity to local versus global market conditions underlies the change in fund price–to–fundamental value ratios in crisis episodes.

Policy-relevant conclusions

• Monitoring international investor participation is important because:
  • Increased foreign participation can provide stabilization effects in crisis-originating countries.
  • The same increased foreign participation can raise vulnerability of other countries to contagion through amplified transmission of global shocks.
• Understanding investor sensitivity profiles (local vs. global) can inform crisis prevention and management strategies.

Content in this bundle

• Crises, Contagion, and the Closed-End Country Fund Puzzle - WP/98/143
  • Crises, Contagion, and the Closed-End Country Fund Puzzle - WP/98/143 (Markdown version)
  • Crises, Contagion, and the Closed-End Country Fund Puzzle - WP/98/143 (PDF)