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Emerging Markets: Investing with Political Risk

Author

Listed:
  • Ephraim Clark

    (Middlesex University, U.K.)

  • Radu Tunaru

    (Middlesex University, U.K.)

Abstract

This paper presents a model that measures the impact of political risk on portfolio investment when the political risks are multivariate and correlated across countries. The multivariate approach generalizes the single country model but retains most of its characteristics in terms of its ability to price political risk based on the stochastic process of exposure to loss and the expected frequency of loss causing events. The methodology is compatible with modern portfolio theory, straightforward to apply and can accommodate the traditional techniques in political risk assessment for the estimation of the relevant parameters.

Suggested Citation

  • Ephraim Clark & Radu Tunaru, 2001. "Emerging Markets: Investing with Political Risk," Multinational Finance Journal, Multinational Finance Journal, vol. 5(3), pages 155-173, September.
    • Handle: RePEc:mfj:journl:v:5:y:2001:i:3:p:155-173
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    References listed on IDEAS

    as
    1. Clark, Ephraim, 1998. "Political Risk in Hong Kong and Taiwan: Pricing the China Factor," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 13, pages 276-291.
    2. Clark, Ephraim, 1997. "Valuing political risk," Journal of International Money and Finance, Elsevier, vol. 16(3), pages 477-490, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Wi Saeng Kim & Esmeralda Lyn & Edward Zychowicz, 2003. "Is the Source of FDI Important to Emerging Market Economies? Evidence from Japanese and U.S. FDI," Multinational Finance Journal, Multinational Finance Journal, vol. 7(3-4), pages 107-130, September.
    2. Francesco Guidi & Rakesh Gupta, 2011. "Are ASEAN stock market efficient? Evidence from univariate and multivariate variance ratio tests," Discussion Papers in Finance finance:201113, Griffith University, Department of Accounting, Finance and Economics.
    3. Smimou, K., 2014. "International portfolio choice and political instability risk: A multi-objective approach," European Journal of Operational Research, Elsevier, vol. 234(2), pages 546-560.
    4. Gupta, R. & Donleavy, G.D., 2009. "Benefits of diversifying investments into emerging markets with time-varying correlations: An Australian perspective," Journal of Multinational Financial Management, Elsevier, vol. 19(2), pages 160-177, April.
    5. Manfred Fruhwirth & Paul Schneider & Markus S. Schwaiger, 2007. "Timing Decisions in a Multinational Context: Implementing the Amin/Bodurtha Framework," Multinational Finance Journal, Multinational Finance Journal, vol. 11(3-4), pages 157-178, September.
    6. Lorne Switzer & Alan Picard, 2015. "Idiosyncratic Volatility, Momentum, Liquidity, and Expected Stock Returns in Developed and Emerging Markets," Multinational Finance Journal, Multinational Finance Journal, vol. 19(3), pages 169-221, September.
    7. Vishaal Baulkaran & Nathaniel C. Lupton, 2020. "U.S. FDI and Shareholder Rights Protection in Developed and Developing Economies," Multinational Finance Journal, Multinational Finance Journal, vol. 24(3-4), pages 155-182, September.
    8. Nabamita Dutta, 2012. "Effect of the Political Regime on Asset Returns in Emerging Markets: An Empirical Investigation," South Asian Journal of Macroeconomics and Public Finance, , vol. 1(1), pages 135-156, June.

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    More about this item

    Keywords

    geometric Brownian motion; insurance policy; Poisson arrival process; portfolio investment; political risk;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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