How To Measure Country Risk: Market Indicators Versus Country Risk Ratings

Abstract

The economic outlook for the future is greatly influenced by long-term corporate investments, where risk indicators are essential inputs for current business decisions. Due to country risk, companies should demand higher returns in some countries, for the same investments, than in others. Sovereign risk and country risk ratings also provide information about the country risk, but the methods are different. The paper has two objectives. The first is to introduce the most common alternatives to measure country risk. The second is to examine the relationship between country risk and sovereign risk, than compare the stability of the two measures. The analysis is based on the IHS Global Insight (GI) score and five-year sovereign credit default swap (CDS) spreads.