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Sovereign Credit Ratings, Transparency and International Portfolio Flows

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  • Gande, Amar
  • Parsley, David

Abstract

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 21118.

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Date of creation: Feb 2010
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Handle: RePEc:pra:mprapa:21118

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Keywords: Asymmetric effects; portfolio flows; sovereign rating agencies;

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Cited by:
  1. Gaston Gelos, 2011. "International Mutual Funds, Capital Flow Volatility, and Contagion-A Survey," IMF Working Papers 11/92, International Monetary Fund.
  2. Mirela Virgínia Perrella Scarabel & Mauro Rodrigues Júnior, 2011. "O Impacto De Mudanças De Rating Soberanosobre A Taxa De Câmbio Em Países Emergentes," Anais do XXXVIII Encontro Nacional de Economia [Proceedings of the 38th Brazilian Economics Meeting] 157, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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