Crisis, contagion and cross-border effects: Evidence from the Latin American closed-end fund market

Abstract

This paper investigates the behavior of four Latin American closed-end country funds – Argentina, Brazil, Chile and Mexico – in the context of the 1994 Mexican and 1997 Asian financial crises. A vector error correction model that imposes a bivariate GARCH-M framework is used to examine volatility spillover and cross-border relationships between each fund's share price (SP) and its underlying net asset value (NAV). Several important results emerge: (a) consistent with the notion of market efficiency, NAV and SP of each fund share a long-run equilibrium relationship; (b) the Mexico Fund plays an influential role during the crises as its NAV and SP influence each other and, furthermore, its discounts, and those of Argentina, exert a strong impact on the movements in the other funds' discounts; and (c) cross-border volatility spillover has a significant impact on changes in NAV and SP. The results of the study provide insights into the differential investor sentiment hypothesis and the evolution of fund discounts in the presence of economic shocks.