Equity Investment by Global Funds: Return and Sovereign Risk

55 Pages Posted: 23 Sep 2018

See all articles by Christoforos Andreou

Christoforos Andreou

Cyprus University of Technology

Neophytos Lambertides

Cyprus University of Technology

Andreas Savvides

Cyprus University of Technology

Date Written: March 2018

Abstract

We examine the rate of return earned by global funds on equity investment in emerging markets (EMs) particularly the role played by sovereign credit risk. Changes in sovereign credit ratings (upgrades/downgrades) influence excess (over risk free rate) returns earned by foreign investors: lower excess returns are associated with lower risk. The effect of credit upgrades and downgrades, however, is not symmetric. By contrast, credit outlook or credit watch announcements do not seem to influence foreign investors’ excess returns. When it comes to abnormal (risk-adjusted) returns, foreign investors treat the information contained in credit rating announcements differently from that in outlook/watch announcements. The differing effect of these two is not evident for the risk-adjusted returns of domestic stock market indexes. There is evidence, however, that the behavior of foreign investors influences significantly the risk-adjusted returns of EM stock market indexes.

Keywords: Foreign Investors, Equity Return, Sovereign Risk

JEL Classification: F21, G11, G12, G15

Suggested Citation

Andreou, Christoforos and Lambertides, Neophytos and Savvides, Andreas, Equity Investment by Global Funds: Return and Sovereign Risk (March 2018). Available at SSRN: https://ssrn.com/abstract=3243269 or http://dx.doi.org/10.2139/ssrn.3243269

Christoforos Andreou

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Andreas Savvides (Contact Author)

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

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