Sovereign Credit Ratings and Portfolio Investments in Emerging Economies

Abstract

In this paper, we are examining the potential effects on portfolio investments that result from changes in sovereign credit ratings within 14 emerging economies over the years 1994-2010. As previous literature indicates, a major factor in determining whether a country has access to capital is based on its sovereign credit risk, which takes into account a country’s likelihood of defaulting on its foreign debt obligations. This paper examines past literature, explains our data collection methodology, applies various econometric techniques to estimate the impact of credit rating changes, and test different econometric theories to see whether they apply in these circumstances. Using data on sovereign credit ratings from Fitch Ratings and data on portfolio investments from the IMF, and utilizing primarily fixed effects and panel OLS estimation models, we find evidence of some responsiveness of portfolio investments to up- and downgrades in sovereign credit ratings.

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