Academic journal article Business: Theory and Practice

Comparison of Country Risk, Sustainability and Economic Safety indices/Salies Rizikos, Tvarumo Ir Ekonominio Saugumo Rodikliu Palyginimas

Academic journal article Business: Theory and Practice

Comparison of Country Risk, Sustainability and Economic Safety indices/Salies Rizikos, Tvarumo Ir Ekonominio Saugumo Rodikliu Palyginimas

Article excerpt

Introduction

Every year it becomes more and more difficult to analyse and predict changes in the financial, economic, and political sectors of business. The importance of country risk analysis is now more understandable and potential for it is growing by establishing a growing number of country risk rating agencies, which combine a wide range of qualitative and quantitative information regarding alternative measures of economic, financial and political risk with associated composite risk ratings. However, the accuracy of any rating agency with regard to any or all of these measures is open to questioning. In the study, Hoti (2005a) provides a qualitative comparison of country risk rating systems used by seven leading rating agencies, as well as a novel analysis of four risk ratings using univariate and multivariate volatility models for nine East European countries. These ratings are compiled by the International Country Risk Guide, which is the only risk rating agency to provide consistent monthly data on a large number of countries since 1984. The empirical results enable a comparative assessment of the conditional means and volatilities associated with county risk returns, defined as the rate of change in country risk ratings, across the aforementioned nine East European countries.

Over the past two decades, interest has grown in developing indicators to measure sustainability. Sustainability is presently seen as a delicate balance between the economic, environmental and social health of a community, nation and of course the earth. At present, measures of sustainability tend to be an amalgam of economic, environmental and social indicators. Economic indicators have been used to measure the state of the economy for much of this century. Social indicators are largely a post-war phenomenon and environmental indicators are more recent still. Interest in developing these indicators largely began when their respective became stressed, aiming to monitor performance and indicate any required ameliorating action. Whereas economists have no difficulty deriving objective and quantitative indicators, sociologists had and still have great difficulty in deriving indicators, because of intangible quality of life issues. Environmental scientists have less difficulty when limiting themselves to abundance of single species rather than biodiversity and ecological integrity.

Sustainability, however, is more than just the interconnectedness of the economy, society and the environment. Although, these are important, they are largely the external manifestations of sustainability. The internal, fundamental and existential dimensions are neglected. Sustainability, therefore, may be something more grand and noble: dynamics, a state of collective grace, a facet of Gaia or even of the Spirit. Rather than asking how we can measure sustainability, it may be more appropriate to ask how we measure up to sustainability.

1. Definitions of country risk

For some researchers, country risk refers to the "probability of occurrence of political events that will change the prospects for profitability of a given investment" (Haendel et al. 1975). One of approaches adopts a practical stance and analyses risk as a negative outcome. With this meaning, risk will exist if it implies a possible loss or at least, a potential reduction of the expected return, as stated by Meldrum (2000).

The concept of risk has different meanings and could be understood either as a performance variance or just as the likelihood of a negative outcome that reduces the initially expected return. The concept of downside risk was already mentioned in Markowitz (1959); though, it is mainly because of computational difficulties in handling this type of model as well as the assumption of normally distributed returns that the variance was favoured as a measure of risk. The paper of Nawrocki (1999) reviews the literature and presents the advantages of using a downside risk approach in view of a total risk stance. …

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