Data on country funds support the hypothesis of asymmetric information: that the holders of underlying assets have more information about local assets than the country fund holders do.
Using data on country funds, Frankel and Schmukler study how differential access to information affects international investment.
They find that past changes in net asset values (NAVs) and discounts predict current country fund prices more commonly than prices and discounts predict NAVs. The price (NAV) adjustment coefficients are low and negatively correlated with the local (foreign) market variability—but not with the fund price (NAV) variability.
NAVs seem to be closer to local information. They are the asset prices that react first to local news. Later the country fund holders receive the information and those prices react after NAVs have reacted. The 1995 Mexican crisis and the 1997 Asian crisis are two examples of this type of behavior.
These findings are consistent with the hypothesis of asymmetric information, according to which the holders of the underlying assets have more information about local assets than the country fund holders do.
Frankel and Schmukler empirically test the asymmetric information hypothesis against the noise traders hypothesis. A theoretical model is presented in the appendix.
This paper—a product of Macro-economics and Growth, Development Research Group—is part of a larger effort in the group to understand how international financial markets work. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Rebecca Martin, room MC3-354, telephone 202-473-9065, fax 202-522-3518, Internet address rmartin1@worldbank.org. (31 pages)
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