Financial fragility and Mexico's 1994 peso crisis: An event-window analysis of market-valuation effects

Persistent cycles of devaluation, debt repudiation, and financial crisis ha ve been recurrent themes in Latin America and elsewhere. This study focuses on one such event, namely, the Mexican peso devaluation, debt, and financi al-sector crisis of 1994-95. This paper utilizes an event-study framework, with daily stock market data, to document financial market responses to the unfolding crisis. In particular, we find that the devaluation itself was v iewed as relatively benign by market participants. The results also show li ttle evidence that investors anticipated the peso devaluation, the declinin g reserve levels of Mexico's central bank, and the increasing sovereign def ault risk of Mexico. However, the results suggest that the equity markets d id respond positively to remedial actions taken by governmental authorities , such as the Clinton bailout plan.