Measuring Political Risk Premium

Sovereign spreads sometimes overstate and sometimes understate the actual extent of an investment’s “political risk”, for example. We suggest an alternative to spreads between Sovereign Bonds of the country and US Treasury as proxy for country risk premium. The Political Risk Premium (PRP) can be arrived at from Residual Income Value (RIV) implied cost of equity for the companies in EM and then compared to the weighted average cost of equity of global peers.