By
Borsgade
In this article and supporting video, Aswath provides an update to his country risk premium, starting with the drivers of country risk, moving on to measures (sovereign ratings, country risk scores, equity risk premiums) and closing with an explanation of how country risk plays out in business and investing decisions.
Understanding and measuring country risk is crucial for businesses and investors. Country risk varies due to political structures, corruption, war, violence, and legal protections. Sovereign ratings, country risk scores, and equity risk premiums are essential tools for quantifying these risks. Businesses must adjust their cost of capital based on these measures to avoid cross-subsidization, while investors should consider the geographic operations of companies. Consistency in valuation, including currency effects, is vital for accurate risk assessment and informed decision-making.
If there is a lesson that I learned from the 2008 market crisis, it is that market crises almost always play out as big changes in the price of risk. In keeping with that lesson, I have been updating my implied equity risk premiums for the S&P 500 every month, and my country risk premiums twice a year.
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