country risk components..

There is a deal of discussion on HC on the topic of sovereign risk and how that externality is 'priced' into the share price..

HC community might find this paper by Cam Harvey of interest ..for those who dont have the patience see below an abstract and below that the link for the full paper:

"Country Risk Components, the Cost of Capital, and
Returns in Emerging Markets":

Abstract
This paper examines the importance of political risk, the financial risk, and economic risk in
portfolio and direct investment decisions. In addition, the components of each of these risk
measures are examined. First, I explore whether any of these measures contain information
about future expected stock returns by conducting trading simulations. Second, I show the
relation between these measures and implied costs of capital based on earnings forecasts. My
results suggest that the country risk measures are correlated future equity returns – but only
in emerging markets. These results are consistent with emerging markets being to some
degree segmented from world capital markets.

http://faculty.fuqua.duke.edu/~charvey/Research/Chapters/C29_Country_risk_components.pdf