Information frictions in financial markets are key to understanding episodes with macroeconomic consequences—particularly in emerging market economies (EMEs), where such frictions are more pronounced. These frictions can cause less-informed investors—those with limited knowledge of a country’s fundamentals—to overreact to market noise. As a result, asset prices may deviate from fundamentals, increasing the risk of sudden stops.
In a recent paper, we study how investors form beliefs about EME asset values—specifically, how they respond to price changes unrelated to fundamentals. To do so, we exploit a technical error in the calculation of Argentina’s Emerging Markets Bond Index (EMBI) spread as a natural experiment. This setting allows us to identify the “information effect,” whereby less-informed investors treat market prices as signals, using them to infer what informed investors know—and, ultimately, to update their beliefs about an asset’s intrinsic value.
Empirically identifying the information effect is challenging. Even if an asset’s desirability were observable, prices and desirability often move together due to third factors—primarily, the asset’s underlying fundamentals—rather than belief revisions alone. Ideally, what is needed is a price shift that is fully exogenous, unrelated to fundamentals. The EMBI pricing mistake due to the technical error offers precisely this kind of exogenous variation.
The mistake occurred in the early hours of January 7, 2025, when the EMBI spread dropped by more than 114 basis points—a sharp decline that attracted investor attention. Later that same day, a mistake in the real-time page of the index pages was revealed. This EMBI reduction was neither anticipated nor driven by changes in Argentina’s fundamentals or the global environment, making it a purely exogenous shock. Argentina’s “grades” soared—without even having to “study.”
We investigate how this change influenced Argentina’s stock market. Stock markets have always been tied to sovereign risk and, more broadly, to assessments of the government’s ability to foster macroeconomic stability and a regulatory framework with transparent rules. However, recently, this relationship appears to have intensified in Argentina, with measures like the EMBI spread and stock indexes reflecting a medium-term trend toward improvement. Thus, it is not surprising that recently investors may have used the EMBI to learn about the intrinsic value of Argentine firms.
Using a difference-in-differences (DiD) approach, we find that the technical error caused Argentina's stock prices to increase by approximately 1.18% more than those of other EMEs during the event window, with the effect being statistically significant at the 1% level.
In figure 1, panel A shows that Argentina’s index rose during this window, peaking at over 4%—equivalent to 1.88 standard deviations of its percentage change in comparable intraday windows over the previous month—before declining as the correction was announced. Panel B shows that in the fifteen 10-minute intervals preceding the mistake, there was no systematic difference between Argentina’s index and those of the other EMEs. This absence of a pre-trend supports a causal interpretation of our results.
Figure 1: Movement in Argentina’s Index during the Event and the Pre-Trend Test
After the publication of the incorrect EMBI spread, the difference between Argentina’s index and those of the other EMEs became statistically significant and positive. The impact initially declined, losing statistical significance, but then rose again and regained statistical significance when internet searches related to the term “country risk” peaked. This simultaneity between the effect and the moment the news gained the most visibility in the media and on the internet provides support for the presence of “information effects.”
Additionally, we use a difference-in-difference-in-differences model to test whether the pricing mistake affected Argentine firms linked to the shale reserve Vaca Muerta more than others. We analyze Argentine firms included in the index for which data are available and classify them as linked to the Vaca Muerta reserve if they are involved in exploration, production, unconventional hydrocarbon extraction, or gas supply and distribution from the region.1 The result shows that while all Argentine firms saw price increases, firms linked to Vaca Muerta experienced an additional 1.31% increase. This outcome indicates that investors interpreted the drop in the EMBI as enhancing the profitability prospects of these oil and gas reserves.
We validate the results through several robustness checks. Using data on individual firms instead of an aggregate index yields similar results to the DiD model, as does an alternative capitalization-weighted index of the 10 largest firms. For the Vaca Muerta results, using indexes rather than data on individual firms preserves the effect, and broadening the definition to include firms that benefited indirectly from Vaca Muerta’s output further amplifies it. These results reinforce the view that firms linked to the region improved due to better perceptions of sovereign risk.
Our findings underscore the importance of sovereign risk in EMEs, where even changes driven by technical errors can influence asset valuations. The findings also highlight the importance of an effective communication strategy for EMEs. Although strong fundamentals help to sustain a country's attractiveness as an investment destination, clear and timely communication by policy makers is essential to prevent nonlinear effects that could lead in certain circumstances to events with unintended macroeconomic consequences.
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