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Country risk and the cost of equity in emerging markets

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  • Warnes, Ignacio
  • Warnes, Pablo E.

Abstract

We test whether the country risk variable is a significant risk factor in several CAPM based models of expected equity returns in Argentina, Brazil, Mexico, South Africa, Russia, Turkey and Venezuela. We also test the usual assumption that country risk can be added with a coefficient value of one. Only in Brazil and Mexico the risk premium associated with the country risk factor is significant. Adding country risk with a coefficient value of one is not generally valid and moreover, in Brazil and Mexico the risk premium for country risk takes a negative value. This shows that international investors may look for exposure to country risk.

Suggested Citation

  • Warnes, Ignacio & Warnes, Pablo E., 2014. "Country risk and the cost of equity in emerging markets," Journal of Multinational Financial Management, Elsevier, vol. 28(C), pages 15-27.
    • Handle: RePEc:eee:mulfin:v:28:y:2014:i:c:p:15-27
    DOI: 10.1016/j.mulfin.2014.08.001
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    More about this item

    Keywords

    Emerging markets; Equity returns; CAPM; Country risk; Sovereign credit risk;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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