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A new country risk index for emerging markets: A stochastic dominance approach

  • Agliardi, Elettra
  • Agliardi, Rossella
  • Pinar, Mehmet
  • Stengos, Thanasis
  • Topaloglou, Nikolas

An optimal weighting scheme is proposed to construct economic, political and financial risk indices in emerging markets using an approach that relies on consistent tests for stochastic dominance efficiency. These tests are considered for a given risk index with respect to all possible indices constructed from a set of individual risk factors. The test statistics and the estimators are computed using mixed integer programming methods. We derive an economic, political and financial risk ranking of emerging countries. Finally, an overall risk index is constructed. One main result is that the financial risk is the leading contributor to sovereign risk in emerging markets followed by the economic and political risks.

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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 19 (2012)
Issue (Month): 5 ()
Pages: 741-761

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Handle: RePEc:eee:empfin:v:19:y:2012:i:5:p:741-761
Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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