CFAI Text, pg. 283 “…the key drawback is that there is no objective way to establish a country risk premium” Didnt we learn EXACTLY how to do this in L1 Corporate Finance? They even gave us the developing market country risk premium formula CRP = [soverign bond yield - t-bond yield] * (std. dev of developing country equity index / std. dev. of soverign bonds in US currency) ???
my two cents, with the SYS (soverign yield spread), it is assumed the yield is correlated with equity markets of a developing market - highly unlikely and the risk embedded in the yield doesn’t account for enhanced default risk posed by a developing market government. it could simply mean “no objective way = no consensus”
**correction: not correlated with the economy
I think the point they’re trying to make is you cannot quantify a country’s willingness to repay its debt. Although the ability to repay is there, a country can simply choose not to repay its debt. In addition, it is difficult to quantify political risk.
Northeastern Student Wrote: ------------------------------------------------------- > it could simply mean “no objective way = no consensus” +1