Country Risk Analysis of Pakistan: Evidence from Karachi Stock Exchange

Abstract

This study analyzes the country risk of Pakistan by employing the international capital asset pricing model (ICAPM) framework for the time period of July 2000 to June 2015. This study has used the country beta approach to examine the country risk based on the local as well as the global economic indicators. The study includes one domestic variable; foreign exchange reserves (cash holdings) and three global variables; real foreign exchange rate, gold prices, and oil prices to examine the impact of these economic factors on country risk by employing Beta market approach. The empirical results of this study conclude that time-varying beta in Pakistan is affected by the global economic factors as well as the domestic economic factors and hence support the international capital asset pricing model in case of Pakistan. The findings of the study suggest that the international investors can frame out the hedging policy against country risk in measuring investment return and that an effective monetary and fiscal policy can be designed by considering the relationship of macroeconomic factors with country risk.