COUNTRY RISK MODELLING USING TIME-VARYING FUNDAMENTAL BETA APPROACH: A VISEGRAD GROUP COUNTRIES AND ROMANIA PERSPECTIVE

Financial instability is a recurring, macroeconomic phenomenon which has been manifesting itself in form of the Great Recession since 2007. The paper pursues the question of how financial instability affects the risk of a country. We discuss the relation of the risk of a particular country to international investment activities and refer to unique risk faced by foreign investors when investing that country. In the study we intend to identify the relationship between country risk indicators, local and global, and so called fundamental beta coefficient from the capital asset pricing model. As we have found out, the global risk factors have greater influence on their betas than local factors. Betas are sensitive to the consequences of economic development like recent economic crisis. In almost all of observed cases the Betas reached their maximum in the period of 2008-2009. Furthermore a rapid increase of betas in Hungary and Romania correspondents to the time of official request for the financial assistance and can be used as case of Beta sensitivities.