As companies and investors globalize, we are increasingly faced with estimation questions about the risk associated with this globalization. When investors invest in China Mobile, Infosys or Vale, they may be rewarded with higher returns, but they are also exposed to additional risk. When Siemens and Apple push for growth in Asia and Latin America, they clearly are exposed to the political and economic turmoil that often characterize these markets. In practical terms, how, if at all, should we adjust for this additional risk? We will begin the paper with an overview of overall country risk, its sources and measures. We will continue with a discussion of sovereign default risk and examine sovereign ratings and credit default swaps (CDS) as measures of that risk. We will extend that discussion to look at country risk from the perspective of equity investors, by looking at equity risk premiums for different countries and consequences for valuation. In the fourth section, we argue that a company’s exposure to country risk should not be determined by where it is incorporated and traded. By that measure, neither Coca Cola nor Nestle are exposed to country risk. Exposure to country risk should come from a company’s operations, making country risk a critical component of the valuation of almost every large multinational corporation. In the final section, we will also look at how to move across currencies in valuation and capital budgeting, and how to avoid mismatching errors.

This paper empirically models China’s stock prices using conventional fundamentals: corporate earnings, risk-free interest rate, and a proxy for equity risk premium. It uses the estimated long-run stock price misalignments to date booms and busts, and analyses equity market reforms and excess liquidity as potential drivers of these stock price misalignments. Our results show that China’s equity prices can be reasonable well modelled using fundamentals, but that various booms and busts can be identified. Policy actions, either taking the form of deposit rate changes, equity market reforms or excess liquidity, seem to have significantly contributed to these misalignments.

This paper empirically models China’s stock prices using conventional fundamentals: corporate earnings, risk-free interest rate, and a proxy for equity risk premium. It uses the estimated long-run stock price misalignments to date booms and busts, and analyses equity market reforms and excess liquidity as potential drivers of these stock price misalignments. Our results show that China’s equity prices can be reasonable well modelled using fundamentals, but that various booms and busts can be identified. Policy actions, either taking the form of deposit rate changes, equity market reforms or excess liquidity, seem to have significantly contributed to these misalignments.

The expected equity risk premium is a key input of many asset prcing models in finance. There exist a number of methods to estimate the risk premium. It is also well documented that the risk premium is time-varying. This paper briefly reviews two different approaches. More specifically, the historical average and relative estimation are taken into closer examination. The first approach is applied to estimate equity risk premium for stock markets in Great China when the stock markets were recovering from the bottom. Then the relative estimation approach is also adopted to empirical data to justify the findings in the first one, which takes into consideration the lower required rate of return for Chinese investors due to lack of investment opportunities. After making these adjustments, we find that risk premium in mainland China is close to risk premium for Hong Kong and Taiwan markets. All of those markets have higher risk premium compared to US market. The risk premium for Shanghai and Shenzhen market are about 8% and 10% respectively. For Hong Kong and Taiwan these numbers become 8% and 9%, where the long-term forward-looking risk premium for US market is about 4%.

This paper firstly discusses alignment of SWFs with macroeconomic policy. We believe that SWFs can become an effective tool for fiscal policy; SWF investments should be made in alignment with the monetary authority, and help stabilize the exchange rate. SWFs also contribute to stability of the national balance sheet. Asset allocation of SWFs has significant impacts on the current and capital accounts of both domestic and international balance sheets. Secondly, this paper explores the impacts of SWFs on the global financial market and its stability, including those on asset bubbles, equity risk premium and financial market stability. We argue that the potential negative impact of SWFs on the global financial market is very limited, and that they are important stabilizing forces in the global financial market. We believe that SWFs contribute to the coordination of macroeconomic policy from a domestic point of view and to the stability of global financial market from an international point of view.