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Revisiting Sovereign Ratings, Capital Flows and Financial Contagion in Emerging Markets

Noha Emara () and Ayah El Said
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Noha Emara: Rutgers University, Department of Economics
Ayah El Said: City University London, Department of Economics

World Journal of Applied Economics, 2015, vol. 1, issue 2, 3-22

Abstract: This study revisits sovereign credit ratings, contagion and capital flows to Emerging Markets (EMs), and clarify the relationship between them. Specifically, this study analyzes how the changes in sovereign rating influence different types of capital flows to EMs and whether the changes in the different kinds of capital flows in one country be explained by a sovereign ratings’ change in another country. Using Arellano-Bover/Blundell-Bond Dynamic Panel System GMM for 23 EMs over the period 1990-2012 the results of the study suggest that sovereign ratings is a crucial factor for EMs’ access to international capital markets and that capital flows is a major source of financing for Ems. In addition, the results show that financial contagion may continue to be a threat to capital flowing into EMs and that financial crisis increases the impact of sovereign rating on foreign direct investment but is not the case with portfolio investment.

Keywords: Sovereign Rating; Capital Flows; System GMM; Foreign Direct Investment; Portfolio Investment (search for similar items in EconPapers)
JEL-codes: O16 O43 N20 (search for similar items in EconPapers)
Date: 2015
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