Capital Flows to Emerging Markets

Abstract

The Nineties have witnessed a boom of capital flows towards emerging markets that found an abrupt end with the Asian financial crisis in 1997/98. In general, this crisis has taken foreign investors by surprise resulting in a massive halt of foreign capital flows and a credit crunch in international and several domestic financial markets. During and after the Asian and Mexican financial crises investors complained about the inefficiency of rating agencies and blamed rating agencies for enforcing the dynamics of financial crises. The present study will thus focus on country risk, one of the principal elements that guide capital flows within international financial markets. It will present empirical analysis whether rating agencies stated their country risk evaluations timely and whether their risk evaluation was conform with those undertaken by financial markets. The first chapter will introduce the reader to international financial markets and their major developments during the Nineties. I will also review empirical and theoretical literature on financial crisis and their causes. This review, on the one hand, will acquaint the reader with the up-to-date discussion of causes for financial disruptions. On the other hand, it will become evident that theory has not yet found a unique risk model that predicts financial crises.