Sovereign credit risk and global equity fund returns in emerging markets. (October 2020)

• Record Type: Journal Article
• Authors: Andreou, Christoforos K.; Lambertides, Neophytos; Savvides, Andreas
• Is Part Of: Journal of international money and finance. Volume 107(2020)
• Publication Date: 2020-10
• Subjects: Foreign investors -- Equity return -- Sovereign risk; F21 -- G11 -- G12 -- G15; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2020.102218
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: The rate of return earned by global funds on equity investment in emerging markets (EMs) and the role played by sovereign credit risk. Sovereign credit upgrades or downgrades influence excess returns earned by foreign investors. Credit outlook or credit watch announcements do not seem to influence foreign investors' excess returns. Foreign investors treat information contained in credit rating announcements differently from that in credit outlook/watch announcements. Sovereign credit risk announcements explain risk-adjusted returns in excess of the return of domestic market indexes in EMs. Abstract: We examine the rate of return earned by global funds on equity investment in emerging markets (EMs) particularly the role played by sovereign credit risk. Sovereign credit upgrades or downgrades influence excess (over risk free rate) returns earned by foreign investors: lower excess returns are associated with lower risk. The effect of credit upgrades and downgrades, however, is not symmetric. By contrast, credit outlook or credit watch announcements do not seem to influence foreign investors' excess returns. When it comes to abnormal or risk-adjusted returns, foreign investors treat the information contained in credit rating announcements differently from that in credit outlook/watch announcements. Furthermore, our findings provide evidence for the superior performance of foreign investors in EMs relative to the return of domestic market indexes in EMs, highlighting the influential role of sovereign credit risk announcements on foreign investors' abnormal returns.