Modelling Volatility Spillovers In Country Risk Ratings

In times of uncertainty, the risks associated with engaging in international operations have increased substantially. Country risk reflects the ability and willingness of a country to service its foreign financial obligations. Such risk may be prompted by country-specific and regional economic, financial, political and composite factors. The paper provides a novel analysis of four risk ratings using multivariate conditional volatility models for six countries situated in the Balkan Peninsula. These ratings are compiled by the International Country Risk Guide (ICRG), the only risk rating agency to provide consistent monthly data for a large number of countries since 1984. The empirical results show that these models are able to capture the dynamics in the conditional variance and the country spillover effects in the country risk ratings.