Sovereign Credit Ratings and the Transnationalization of Finance – Evidence from a Gravity Model of Portfolio Investment

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. This paper tests that hypothesis with data on sovereign credit ratings and foreign portfolio investment. A rating-related gravity model of finance is derived from the choicetheoretical framework of Okawa and van Wincoop (Gravity in International Finance, 2012) and estimated in three stages. At the first stage, the authors find that the introduction and evolution of sovereign ratings since the 1970s has affected inward portfolio investment in host countries. At the second stage, they examine to which extent sovereign ratings help to predict the degree of investors' home bias, and whether they can account for the divergent dynamics before and after the global financial crisis. At the third stage, the authors look at the explanatory content of ratings for the determination of the size of bilateral portfolio investment. Evidence for a significant role of sovereign ratings is found at all three stages.

Dampak Pertumbuhan Ekonomi, Kontrol Korupsi, Dan Yield Terhadap Investasi Asing Di Pasar Sun

“…Peringkat negara (sovereign rating) berkontribusi pada peningkatan arus modal antar negara dalam beberapa dekade terakhir, terutama pada investasi portofolio asing. Khususnya sebelum 2008, kualitas peringkat negara tujuan memicu investasi portofolio yang lebih tinggi (Körner dan Trautwein, 2015).…”

The impact of market sectors and rating agencies on credit ratings: global evidence

“…Boot et al (2006) even argue that ratings serve as a focal point on which investors may rationally base their investment and pricing decisions. Körner and Trautwein (2015) show that sovereign ratings have for decades served as guides to investors for cross-border capital flows. Still, according to Hilscher and Wilson (2016), the multi-dimensionality of credit risk prevents a single ordinal measure from expressing all the relevant underlying information and to simultaneously optimally predict default given idiosyncratic and systematic risks.…”

From International to Transnational Mining: The Industry’s Shifting Political Economy and the Caribbean

“…These groups, as part of an emergent global power bloc, have promoted development through the fragmentation of national economies and insertion into global circuits of accumulation. Neoliberal restructuring, for example, through privatization and austerity measures, has opened further space for global networks of production (Dicken 2011) and finance (CARICOM 2005;Körner & Trautwein 2014;Watson 1985). To guarantee their own social reproduction, state managers have promoted deeper integration with the global economy.…”