Country risk at investing in capital markets – the case of Italy

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Given the current turbulences on the European capital markets, as well as the expectations of a new recession, it is possible to expect that the risk of individual countries and their capital markets will increase significantly. This is particularly the case of those countries, which have long-term problems with economic instability and imbalances. The basis for country risk quantification is the country credit rating and credit risk of the government bonds. The market-based methods react often differently, as their reactions to the actual market developments are more flexible. The purpose of this paper is to compare various methods of country risk measurement. The study is focused on the country risk of Italy, a country that experienced a turbulent economic development over the last two decades. The results show that the CPFER method and sovereign ratings show a similar level of country risk, while the market-based methods show a higher level of country risk.

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    • Figure 1. Bond market spread and rating-based spread (in BP) of Italian government bonds (1998 and 2018)
    • Figure 2. Stock indices DAX and FTSE MIB in 1999–2018
    • Figure 3. Equity risk premium and country risk premium of Italy in 1998–2017
    • Table 1. Economic growth
    • Table 2. Political risk components
    • Table 3. Italy macro-economic indicators in 2017
    • Table 4. Changes in sovereign rating of Italy (Moody’s)
    • Table 5. Rating and risk spreads (January 2018)