A divergence-of-expectations approach to the assessment of country risk
by Dante Di Gregorio; Douglas E. Thomas
International Journal of Business and Globalisation (IJBG), Vol. 27, No. 1, 2021

Abstract: We introduce a new way to conceptualise, assess and manage country risk. Departing from standard approaches that equate risk with expected values (e.g., lower growth implies higher risk), our approach equates risk with the variance of expectations (e.g., greater variation in expectations of growth implies higher risk). The variance-of-expectations approach is more consistent with the manner in which managers conceptualise risk as unpredictability, the chance of loss and the magnitude of loss. The approach is illustrated through the construction of country risk measures derived from cross-national survey data collected by the World Bank. Evidence suggests that the variance-of-expectations approach to country risk assessment introduces new information beyond conventional approaches and may also be more likely to help managers anticipate unfavourable changes in a country's operating environment.

Online publication date: Tue, 22-Dec-2020

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