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Political Risk, Economic Risk and Financial Risk


Claude B. Erb


TR

Campbell R. Harvey


Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)

Tadas E. Viskanta


First Chicago Investment Management Co.

May 6, 1996

Fuqua School of Business Working Paper No. 9606

Abstract:     
How important is an understanding of country risk for investors? Given the increasingly global nature of investment portfolios, we believe it is very important. Our paper measures the economic content of five different measures of country risk: The International Country Risk Guide is political risk, the financial risk, economic risk and composite risk indices and Institutional Investoris country credit ratings. First, we explore whether any of these measures contain information about future expected stock returns by conducting trading simulations. Next, we conduct time-series-cross-sectional analysis linking these risk measures to future expected returns. Second, we investigate the relation between these measures and other, more standard, approaches to risk exposures. Finally, we analyze the linkages between fundamental attributes within each economy, such as book-to-price ratios, and the risk measures. Our results suggest that the country risk measures are correlated future equity returns. We find that the country risk measures are correlated with each other, however, financial risk measures contain the most information about future equity returns. Finally, we find that country risk measures are highly correlated with country equity valuation measures. This provides some insight into the reason why value-oriented strategies generate higher returns.

Number of Pages in PDF File: 41

Keywords: Country Risk Assessment, Mean-Reverision of Risk, Country Trading Strategies, Risk Exposure

JEL Classification: F30, F36, G12, G15

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Date posted: May 8, 2000  

Suggested Citation

Erb, Claude B. and Harvey, Campbell R. and Viskanta, Tadas E., Political Risk, Economic Risk and Financial Risk (May 6, 1996). Fuqua School of Business Working Paper No. 9606. Available at SSRN: http://ssrn.com/abstract=7437 or http://dx.doi.org/10.2139/ssrn.7437

Contact Information

Claude B. Erb
TR ( email )
CA 90272
United States
Campbell R. Harvey (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Tadas E. Viskanta
First Chicago Investment Management Co. ( email )
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