Measuring Idiosyncratic Risk: Implications for Capital Flows
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Measuring Idiosyncratic Risk : Implications for Capital Flows. / Sunesen, Eva Rytter.
Cph. : Department of Economics, University of Copenhagen, 2006.Research output: Working paper › Research
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TY - UNPB
T1 - Measuring Idiosyncratic Risk
T2 - Implications for Capital Flows
AU - Sunesen, Eva Rytter
N1 - JEL Classification: E32, F21, O16, C23
PY - 2006
Y1 - 2006
N2 - This paper offers two refinements of the traditional risk measure based on the volatility of growth. First, we condition GDP growth on structural characteristics of the host country that move only slowly and therefore can be partly predicted by an investor. Second, we adjust conditional risk for the systematic components due to the global and regional interdependence between alternative investment locations. The decomposition of conditional risk into its systematic and idiosyncratic components reveals that not only are African countries on average characterised by a larger conditional risk than Asian and Latin American countries, but the idiosyncratic risk factor also represents a larger share than in other developing countries. As a final contribution, we search the empirical literature on foreign direct investment and risk in order to determine which of the suggested risk measures provide the best description of idiosyncratic risk. Using a general-to-specific methodology, we find that both economic and political risk factors are important elements in the investment decision. We also find that commercial
AB - This paper offers two refinements of the traditional risk measure based on the volatility of growth. First, we condition GDP growth on structural characteristics of the host country that move only slowly and therefore can be partly predicted by an investor. Second, we adjust conditional risk for the systematic components due to the global and regional interdependence between alternative investment locations. The decomposition of conditional risk into its systematic and idiosyncratic components reveals that not only are African countries on average characterised by a larger conditional risk than Asian and Latin American countries, but the idiosyncratic risk factor also represents a larger share than in other developing countries. As a final contribution, we search the empirical literature on foreign direct investment and risk in order to determine which of the suggested risk measures provide the best description of idiosyncratic risk. Using a general-to-specific methodology, we find that both economic and political risk factors are important elements in the investment decision. We also find that commercial
KW - Faculty of Social Sciences
KW - foreign direct investment
KW - global business cycles
KW - regional business cycles
KW - risk decomposition
M3 - Working paper
BT - Measuring Idiosyncratic Risk
PB - Department of Economics, University of Copenhagen
CY - Cph.
ER -
ID: 312722