A portfolio approach for the TESOBONO problem in Mexico during 1994: A simple model
Gonzalez-Lugo Lopez, Jesus
Hartley, Peter R.
Master of Arts
During 1994 domestic and foreign investors in Mexico increased the share of TESOBONOS in their portfolios when they perceived the possibility of a future devaluation of the Mexican peso or, in other words, the abandonment of the controlled floating exchange rate regime. This work finds that both domestic and foreign investors responded to monetary policies followed by Banco de Mexico after March 1994, when adverse political events occurred, keeping their investment in Mexico in TESOBONOS rather than leaving the country. Domestic and foreign investors did not have a high expected probability of devaluation, however, they were certain that if a devaluation was going to happen the size of it would be approximately a hundred percent.
Economics; Finance; Economic theory