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Country Risk

Author

Listed:
  • Tarek A. Hassan

    (Boston University)

  • Jesse Schreger

    (Columbia University)

  • Markus Schwedeler

    (Boston University)

  • Ahmed Tahoun

    (London Business School)

Abstract

We construct new measures of country risk and sentiment as perceived by global investors and executives using textual analysis of the quarterly earnings calls of publicly listed firms around the world. Our quarterly measures cover 45 countries from 2002-2020. We use our measures to provide a novel characterization of country risk and to provide a harmonized definition of crises. We demonstrate that elevated perceptions of a country's riskiness are associated with significant falls in local asset prices and capital outflows, even after global financial conditions are controlled for. Increases in country risk are associated with reductions in firm-level investment and employment. We also show direct evidence of a novel type of contagion, where foreign risk is transmitted across borders through firm-level exposures. Exposed firms suffer falling market valuations and significantly retrench their hiring and investment in response to crises abroad. Finally, we provide direct evidence that heterogeneous currency loadings on global risk help explain the cross-country pattern of interest rates and currency risk premia.

Suggested Citation

  • Tarek A. Hassan & Jesse Schreger & Markus Schwedeler & Ahmed Tahoun, 2021. "Country Risk," Working Papers Series inetwp157, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:inetwp157
    DOI: 10.36687/inetwp157
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    File URL: https://doi.org/10.36687/inetwp157
    File Function: First version, 2021
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    More about this item

    Keywords

    country risk; contagion; investment; employment; textual analysis; earnings calls;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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