The beyondbrics blog notes that in the book “Cracking the Emerging Markets Enigma,” Andrew Karolyi, a professor of Emerging Market Finance at Cornell’s Johnson School, has come up with a matrix ranking 57 emerging markets and developed markets according to which is the most and least risky.
To come up with the emerging market risk ranking, each country is scored on over 70 variables spread out over 6 components. The components measure:
- Market capacity constraints e.g. capital markets (Taiwan comes out best, Venezuela is the worst)
- Operational inefficiencies e.g. trading systems (South Korea comes out best, Nigeria is the worst).
- Foreign accessibility restrictions e.g. foreign ownership limits, currency convertibility or repatriation etc (Poland comes out best, Pakistan is the worst).
- Corporate opacity e.g. the lack of disclosure requirements, the presence of voluntary reporting etc (South Korea comes out best, China is the worst).
- Limits to legal protections e.g. presence or absence of anti-director rights, anti-self dealing rules, judicial (in) efficiencies etc (Malaysia comes out best, Venezuela is the worst).
- Political instability e.g. lack of democratic institutions and regulatory burdens (Chile comes out best, Venezuela is the worst).
The results:
beyondbrics does point out some flaws in the analysis, namely the use of 2012 data to calculate the emerging market risk rankings and the fact that some of his components or variables are more concerns for long term investors while others might concern short term traders.
To read the whole blog post, Book review: Cracking The Emerging Markets Enigma, go to beyondbrics blog on the website of the Financial Times.
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