Sovereign Credit Ratings, Relative Risk Ratings, and Private Capital Flows
This paper examines the influence of sovereign credit ratings and relative risk ratings on private capital flows to 26 emerging and frontier market economies, using quarterly data for 1998-2017. A dynamic panel regression model is used to estimate...
| Main Authors: | , , |
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| Language: | English |
| Published: |
World Bank, Washington, DC
2020
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/600951600350724639/Sovereign-Credit-Ratings-Relative-Risk-Ratings-and-Private-Capital-Flows http://hdl.handle.net/10986/34488 |
| Summary: | This paper examines the influence of
sovereign credit ratings and relative risk ratings on
private capital flows to 26 emerging and frontier market
economies, using quarterly data for 1998-2017. A dynamic
panel regression model is used to estimate the relationship
between ratings and capital flows after controlling for
other factors that can influence capital flows, such as
growth and interest rate differentials and global risk
conditions. The analysis finds that while absolute ratings
were an important determinant of net capital inflows prior
to the global financial crisis in 2008, the influence of
relative risk ratings increased in the post-crisis period,
which was characterized by easy monetary policies and global
liquidity, on the one hand, and greater caution and
discretion on the part of investors on the other. The
post-crisis effect of relative ratings appears to be driven
mostly by portfolio flows. These findings imply that
emerging and frontier markets need to pay greater attention
to their relative economic performance and not just their
sovereign ratings. Tracking changes in relative ratings
could help predict macroeconomic disturbances resulting from
volatile portfolio capital movements. |
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