The Role of Sovereign Credit Ratings in the Transnationalization of Finance

Published with modifications as: Finn Marten Körner and Hans-Michael Trautwein (2015). Sovereign Credit Ratings and the Transnationalization of Finance – Evidence from a Gravity Model of Portfolio Investment. Economics: The Open-Access, Open-Assessment E-Journal, 9 (2015-9): 1-54

Other versions: Finn Marten Koerner and Hans-Michael Trautwein (2014). Sovereign Credit Ratings and the Transnationalization of Finance - Evidence from a Gravity Model of Portfolio Investment. Economics Discussion Papers, No 2014-31, Kiel Institute for the World Economy

This version: ZenTra Working Paper in Transnational Studies No. 20/2013

38 Pages Posted: 2 Nov 2013 Last revised: 27 Dec 2016

See all articles by Finn Marten Körner

Finn Marten Körner

ZenTra - Center for Transnational Studies; Uniper SE

Hans‐Michael Trautwein

Carl von Ossietzky Universität Oldenburg; ZenTra - Center for Transnational Studies

Date Written: October 31, 2013

Abstract

It is a matter of debate in how far credit ratings contribute to allocative efficiency or to excessive volatility of asset prices and cross-border capital flows. Yet it is generally taken for granted that ratings play a significant role in the transnationalization of financial relations. That hypothesis is tested in this paper with regard to data on sovereign credit ratings and foreign portfolio investment. A rating-related gravity model of finance is derived from the choice-theoretical framework of Okawa and van Wincoop (2012) and estimated in three stages, based on the IMF’s Coordinated Portfolio Investment Survey (CPIS) for the 2000s and unilateral datasets going back to the 1970s. At the first stage, it is explored to which extent the introduction and evolution of sovereign ratings has affected inward portfolio investment stocks and flows in the host countries. At the second stage, it is examined to which extent sovereign ratings predict levels of investors’ home bias, as measured by the share of outward portfolio investment holdings in the home countries’ portfolios. At the third stage, the focus is set more specifically on rating determinants of the size of bilateral portfolio investment. Evidence for a significant role of credit ratings in the transnationalization of finance is found at all three stages.

Keywords: credit rating agencies, portfolio investment, gravity model, home bias

JEL Classification: F41, F65, G11, G24

Suggested Citation

Körner, Finn Marten and Trautwein, Hans-Michael, The Role of Sovereign Credit Ratings in the Transnationalization of Finance (October 31, 2013). Published with modifications as: Finn Marten Körner and Hans-Michael Trautwein (2015). Sovereign Credit Ratings and the Transnationalization of Finance – Evidence from a Gravity Model of Portfolio Investment. Economics: The Open-Access, Open-Assessment E-Journal, 9 (2015-9): 1-54; Other versions: Finn Marten Koerner and Hans-Michael Trautwein (2014). Sovereign Credit Ratings and the Transnationalization of Finance - Evidence from a Gravity Model of Portfolio Investment. Economics Discussion Papers, No 2014-31, Kiel Institute for the World Economy; This version: ZenTra Working Paper in Transnational Studies No. 20/2013. Available at SSRN: https://ssrn.com/abstract=2348756 or http://dx.doi.org/10.2139/ssrn.2348756

Finn Marten Körner (Contact Author)

ZenTra - Center for Transnational Studies ( email )

Carl von Ossietzky University of Oldenburg
Ammerländer Heerstraße 138
Oldenburg, 26129
Germany

HOME PAGE: http://www.zen-tra.de

Uniper SE ( email )

E.ON-Platz 1
Düsseldorf, 40479
Germany

HOME PAGE: http://https://www.uniper.energy/

Hans-Michael Trautwein

Carl von Ossietzky Universität Oldenburg ( email )

Ammerländer Heerstraße 114-118
Oldenburg, D-26111
Germany

HOME PAGE: http://www.iw.uni-oldenburg.de/

ZenTra - Center for Transnational Studies ( email )

Ammerländer Heerstraße 138
Oldenburg, 26131
Germany

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