Country Risk Analysis in Emerging Markets: The Indian Example

Abstract

The Beta Country Risk Model, as described by Erb, Harvey and Viskanta (1996) and used by Andrade and Teles (2004) for Brazil, is used to estimate the country risk of India based on several macroeconomic indicators. Ordinary least squares regression is run on the white noise (unexpected component) of these variables to explain the variation in country risk to identify the most relevant of these variables. The study shows that the variation in country risk of India is highly correlated with changes in FDI flows, interest rates (monetary policy), exchange rates and the unemployment rate. The effect of political risk on overall country risk is also studied.