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JOURNAL OF APPLIED BUSINESS AND ECONOMICS

Country Risk and Macroeconomic Factors: Evidence from Asian Markets

Author(s): Rahul Verma, Priti Verma

Citation: Rahul Verma, Priti Verma, (2014) "Country Risk and Macroeconomic Factors: Evidence from Asian Markets," Journal of Applied Business and Economics, Vol. 16, Iss. 5, pp. 51-62

Article Type: Research paper

Publisher: North American Business Press

Abstract:

Using international version of capital asset pricing model (ICAPM), we analyze the response of country

risk in Asia to a set of domestic and global macroeconomic factors. Specifically in a two-step process, we

first estimate country beta models for Hong Kong, Indonesia, Malaysia, Philippines and Singapore and

generate separate series of country risk variables for each market. In the second step we analyze the

response of these country risks to five local factors and seven global factors. The local factors are: money

supply, inflation, economic growth, interest rate and exchange rate while the international factors are:

value of U.S. dollar against currencies of 15 industrialized countries, spread between 90-day Euro dollar

deposit rate and 90 day U.S. Treasury Bill yield, weighted average inflation of G-7 countries, weighted

average short term interest rates of G-7 countries, U.S. dollar price per barrel of crude oil, U.S. interest

rate and U.S. inflation. The results indicate strong and significant effects of the global risk factors on

country risk of all these Asian markets. The price of dollar has significant positive effects in all except in

the case of Malaysia’s country risk. In addition, the dollar euro spread, real interest rates and inflation of

G-7 countries have a significant negative impact on country beta in all the cases. On the other hand,

exchange rate (in case of Malaysia and Singapore) and to some extent money supply (only in case of

Hong Kong) are the only local factors, which have a significant effect on country risk of these markets.

Our results are consistent with previous findings that sensitivity to global risk factors increases as the

markets become more integrated.