1

International portfolio allocations during the Asian financial crisis:

Evidence from U.S. closed-end funds

Kee-Hong BaeKorea University

Kalok ChanHong Kong University of Science & Technology

Wai-Ming FongChinese University of Hong Kong

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MotivationPortfolio strategies of international investors during emerging markets

Do foreign investors destabilize emerging markets?

Positive feedback strategies by foreign investors?

What is the behavior of country closed-end funds traded in the U.S. around the 1997 Asian financial crisis?

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Analysis of the PaperDo closed-end fund discounts move together during the financial crisis

Do investors tend to sell one type of fund (e.g. emerging market fund) and buy another fund (e.g.. U.S. domestic fund)

How the discount and order imbalance of a country fund are affected by the performance n the U.S. market, Asian market, and the individual foreign market?

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Literature ReviewBehavior of foreign investors:

Ppositive feedback trading strategies (Froot, O’Connell and Seasholes (1998), Choe, Kho and Stulz (1999), Kim and Wei (1999)), Karolyi (1999))

Behavior of Country FundsClosed-end fund discount changes over time and negatively related to returns on small returns (Lee, Shleifer, and Vishny (1991))Closed-end country funds are indicators of investor sentiment (Hardouvelis, La Porta and Wizman (1994)Country fund prices co-move with the U.S. market while the NAVs do not

Behavior of country funds during Mexico peso crisisMexican fund NAVs Granger cause country fund prices (Frankel and Schmukler (1994))Peso exchange rate changes affect prices and trading volume of Latin American equities but not Asian equities (Bailey, Chan and Chung (1999))

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Data and Variable ConstructionDomestic and int’l closed-end funds traded on the NYSE during the 1996-98 period

Weekly closing prices and net asset values from the Wiesenberger’s DatabaseTrade and Quote (TAQ) database of the NYSE

Two variablesWeekly discount (DISC)Net-buy volume or order imbalance (NETBUY)

ti

tititi NAV

NAVPRICEDISC

,

,,,

t,iEDUNCLASSIFIt,iSELLt,iBUYt,iSELLt,iBUY

t,iNETBUY

6

Summary statistics

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Summary statistics

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Correlation of order imbalance

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Correlation of discount changes

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Regression Analysis

titasiattittust

ttasiatitusti

LOCALRETDLOCALRETDRETD

DLOCALRETLOCALRETRETDISC

,,3,2,1

0,3,2,10,

= discount change of fund i at week t= net-buy volume ratio of fund i at week t= U.S. market return at week t = local market return for fund i at week t= Asian market return at week t= time dummy variable that is equal to 0 in

the pre-crisis period and 1 in the crisis period

titasiattittust

ttasiatitusti

LOCALRETDLOCALRETDRETD

DLOCALRETLOCALRETRETNETBUY

,,3,2,1

0,3,2,10,

t,iDISC

t,iNETBUY

t,usRET

t,iLOCALRET

t,asiaLOCALRET

tD

11

titasiattittust

ttasiatitusti

LOCALRETDLOCALRETDRETD

DLOCALRETLOCALRETRETDISC

,,3,2,1

0,3,2,10,

12

titasiattittust

ttasiatitusti

LOCALRETDLOCALRETDRETD

DLOCALRETLOCALRETRETDISC

,,3,2,1

0,3,2,10,

13

titasiattittust

ttasiatitusti

LOCALRETDLOCALRETDRETD

DLOCALRETLOCALRETRETNETBUY

,,3,2,1

0,3,2,10,

14

titasiattittust

ttasiatitusti

LOCALRETDLOCALRETDRETD

DLOCALRETLOCALRETRETNETBUY

,,3,2,1

0,3,2,10,

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Summary and Conclusion

Discounts and order imbalance of Asian funds are more correlated with the emerging market funds (like Eastern Europe and Latin American funds) during the crisis period

Discounts of Asian funds and U.S. funds are negatively correlated during the crisis period

U.S. investors in Asian funds pursue positive feedback strategies, but less so during Asian financial crisis