Country risk and the cost of equity in emerging markets

We test whether the country risk variable is a significant risk factor in several CAPM based models of expected equity returns in Argentina, Brazil, Mexico, South Africa, Russia, Turkey and Venezuela. We also test the usual assumption that country risk can be added with a coefficient value of one. Only in Brazil and Mexico the risk premium associated with the country risk factor is significant. Adding country risk with a coefficient value of one is not generally valid and moreover, in Brazil and Mexico the risk premium for country risk takes a negative value. This shows that international investors may look for exposure to country risk.