Sovereign Credit Ratings, Transparency and International Portfolio Flows

Institute for Monetary and Financial Research, Hong Kong

doi:10.2139/ssrn.2445765

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Sovereign Credit Ratings, Transparency and International Portfolio Flows

Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 12/2014

Vanderbilt Owen Graduate School of Management Research Paper No. 2445765

56 Pages Posted: 5 Jun 2014 Last revised: 29 Jul 2022

See all articles by Hong Kong Institute for Monetary and Financial Research

Hong Kong Institute for Monetary and Financial Research

Date Written: June 4, 2014

Abstract

This working paper was written by Amar Gande (Southern Methodist University) and David Parsley (Vanderbilt University and Hong Kong Institute for Monetary Research).

We examine the response of equity mutual fund flows to sovereign rating changes in a wide sample of countries during the crisis prone years from 1996-2002. We find that Sovereign downgrades are strongly associated with outflows of capital from the downgraded country while improvements in a country’s sovereign rating are not associated with discernable changes in equity flows. Transparency, as proxied by the level of corruption matters: more transparent (i.e., less corrupt) countries experience smaller outflows around downgrades. Moreover, abnormal flows around downgrades are consistent with a ‘flight to quality’ phenomenon. That is, less corrupt non-event countries are net recipients of capital inflows, and these inflows increase with the severity of the cumulative downgrade abroad. The results remain after controlling for country size, legal traditions, market liquidity, crisis versus non-crisis periods. Taken together, the results suggest that increasing transparency could mitigate some of the perceived negative effects often associated with global capital flows.

Keywords: Asymmetric Effects, Portfolio Flows, Sovereign Rating Agencies

JEL Classification: G15, F36, G14

Suggested Citation: Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, Sovereign Credit Ratings, Transparency and International Portfolio Flows (June 4, 2014). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 12/2014, Vanderbilt Owen Graduate School of Management Research Paper No. 2445765, Available at SSRN: https://ssrn.com/abstract=2445765 or http://dx.doi.org/10.2139/ssrn.2445765