Political Risk and International Valuation
54 Pages Posted: 11 Sep 2015 Last revised: 9 Dec 2015
Date Written: December 8, 2015
Measuring the impact of political risk on investment projects is one of the most vexing issues in international business. One popular approach is to assume that the sovereign yield spread captures political risk and to augment the project discount rate by this spread. We show that this approach is flawed. While the sovereign spread is influenced by political risk, it also reflects other risks that are likely included in the valuation analysis - leading to the double counting of risks. We propose to use "political risk spreads" to undo the double counting in the evaluation of international investment projects.
Related Research: Political Risk Spreads http://ssrn.com/abstract=2361472
Keywords: Political risk, sovereign spread, sovereign risk, capital budgeting, international cost of capital, project evaluation
JEL Classification: F21, F23, F36, G15, G31, H25, K33, M21, O16, O19
Suggested Citation: Suggested Citation