Country risk measures: how risky are they?

Abstract

As global competition drives corporations into distant, unfamiliar markets, managers are searching for ways to minimize their uncertainty. When formulating their strategies for such environments, managers frequently rely on country risk analysis. Assuming that country risk analysis is an objective, fact-finding process, many managers fail to question these risk reports. The focus of this paper is on the usefulness of these country risk measures. Specifically, the purpose is to investigate the extent to which country risk measures can predict periods of intense instability. We examine eleven widely used measures of country risk across seventeen countries during a nineteen-year time period. Currency fluctuations are used as a surrogate for overall country risk. Results from the empirical analysis indicate that commercial risk measures are very poor at predicting actual realized risks. This result raises important questions about the usefulness of these measures and why managers still choose to use them.