International Monetary Fund

Country Risk Analysis

Campbell R. Harvey,
Fuqua School of Business, Duke University, Durham, NC
National Bureau of Economic Research, Cambridge, MA

March 27-28, 2000

Course Description

This course explores both the quantitative and qualitative methodologies for evaluating country risk. We examine rating systems as well as translating rating into tangible measures for project evaluation. Indeed, one of the main outcomes of country risk analysis is to develop hurdle rates for investment in countries.

The course also discusses the interrelationship between ratings and economic development. In particular, we discuss the impact of economic and financial liberalizations on risk and expected returns in a number of different countries.

The goal of the course to come away with a better understanding of the types of risks that are relevant for country risk analysis. That is, while it is easy to make a list of risk factors, it is difficult to assign weights to the different types of risk. In addition, many risks are diversifiable and not necessarily rewarded.


I reserve the copyright for all parts of the course. Any commercial reproduction of any course materials including lecture notes taken by students during the class is not allowed unless explicit permission is given by me.

Outline and Recommended Reading Assignments

Most of the reading for the course will come from journal articles and working papers. Since many of the articles are from my own research, they are available in PDF form on my web page. I will try to have a CD-ROM pressed for the class.

Pre-class preparation

General background

Monday March 27

Session 1: Risk Factors for Emerging Markets Investments/Admissible Country Analysis

The goal of this session is to come to some understanding of the risk factors that one faces investing in international markets. The admissible country analysis is mainly directed at portfolio investments - but the same type of analysis is also applicable for corporate finance.

Session 2: Project Evaluation in International Markets: Cash Flows

The goal of this session is to introduce some of the complexities of valuation in emerging markets. We will examine specific situations and discuss how to handle both cash flows and the discount rate.

Tuesday March 28

Session 1: Project Evaluation in International Markets: Discount Rates

This session is exclusively concentrated on the discount rate calculation. We discuss the implications of financial segmentation/integration on how a corporation views the discount rate. We also discuss the notion of downside risk and how it applies to international markets.

Session 2: Project Evaluation in International Markets: Real Options Identification

Standard net present value analysis often overlooks important sources of value, in particular, real options. This session details focuses on the identification of real options.

Session 3: Conclusions and supplementary materials

I first examine some of the new advances in risk measurement. I also provide a guide of supplementary materials that may interest you.