Depositary receipts, country funds, and the Peso crash: the intraday evidence

Abstract

We study the intraday reaction of emerging market equities to exchange rate news during the recent Mexican peso crisis using data on American Depositary Receipts (ADRs) and closed-end country funds. Peso exchange rate changes and related news stories affect prices arid trading volumes of Latin American equities but do not affect the proportion of buy versus sell transactions for non-Mexican securities. Momentum in the returns of some non-Mexican equities is heightened at times when the amour.t of Mexican exchange rate news is relatively high. However, led/lag associations between return and buy-sell pattern are more consistent with 'market impact' of trades on returns rather than "positive feedback" from returns to trades. Furthermore, there are only minor differences in the behavior of individual investors reflected in the closed-end fund market versus institutional investors reflected in the ADR market. Thus, we can offer no overwhelming intraday evidence of the so-called ''Tequila Effect".