Evaluating the Relationship Between Sovereign Credit Ratings and Cross-Border Investment Decisions
Posted: Mar 02, 2013
Abstract
The global financial landscape has witnessed unprecedented growth in cross-border investment flows over the past three decades, with sovereign credit ratings emerging as critical signaling mechanisms in international capital markets. Traditional financial theory posits that these ratings serve as efficient summaries of country risk, directly influencing investment decisions through their impact on perceived default probabilities and expected returns. However, the actual mechanisms through which sovereign ratings translate into cross-border investment flows remain inadequately understood, with existing literature often relying on simplified linear models that fail to capture the complex, multi-dimensional nature of this relationship.
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