Sovereign Risk and Investing in Emerging Markets

19 Pages Posted: 1 Oct 2010

See all articles by Sheridan Titman

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

John D. Martin

Baylor University - Department of Finance, Insurance & Real Estate

V. Ravi Anshuman

Indian Institute of Management Bangalore

Date Written: September 30, 2010

Abstract

The traditional approach to evaluating investments in emerging economies has been to add a political default premium to the discount rate used to evaluate the investment’s net present value. This approach contrasts with the textbook approach that accounts for political risk by adjusting expected cash flows. In this paper we discuss the notion of a term structure of default risk and identify the types of valuation errors that occur if cumulative survival rates do not decline exponentially (which is implicit in the use of a constant sovereign default adjustment to the discount rate). Moreover, we point out the importance of structuring the investment project terms so as to minimize the risk of expropriation.

Keywords: Sovereign risk, Emerging markets, Investment Analysis

JEL Classification: G15, G30, G31

Suggested Citation

Titman, Sheridan and Martin, John D. and Anshuman, V. Ravi, Sovereign Risk and Investing in Emerging Markets (September 30, 2010). Available at SSRN: https://ssrn.com/abstract=1685442 or http://dx.doi.org/10.2139/ssrn.1685442

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John D. Martin (Contact Author)

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4473 (Phone)
254-710-1092 (Fax)

HOME PAGE: http://hsb.baylor.edu/html/martinj

V. Ravi Anshuman

Indian Institute of Management Bangalore ( email )

Bannerghatta Rd.
Department of Finance
Bangalore, Karnataka

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