Country Risk in the CESEE Countries: A Fundamental Beta Approach

Abstract

Over the last decades, one of the central issues in financial economics has been the estimation of the equity risk premium and its vulnerability in valuing different investment opportunities in the capital market. In our paper we discuss a problem whether and which of the local and global risk factors have varying degrees of influence on country risk in the selected CESEE countries. Under country risk we understand a part of the country equity systematic risk or so called country beta within the CAPM framework. Using a regression-based approach we focus only on unanticipated component of the fundamental variables, which we find as the residuals from time series auto regressive models. We show effects of the estimated beta increases and decreases on the financial crisis in the CESEE countries and the assistance of the IMF in case of Hungary and Romania.