Country risk in the new EU member states: A country beta approach

In this paper we analyse country risk of the new European Union members. Proposed methodology is based on quantification of time varying beta coefficients, originally motivated by the Capital Asset Pricing Model. We show that the estimated betas are developing in accordance with the countries risk profiles used in the study. The results are compared with the similar research paper of Verma and Soydemir (2006) also covering the crisis periods and analyzing countries running under both the currency board as well as floating exchange rate regimes in Latin America. Our results show that in time of the crisis, the estimated beta increases and, on the other hand, the countries operating under the currency board are characterized by lower betas. We also show that providing of the International Monetary Fund assistance in case of Hungary, Latvia and Romania eliminated increase of their betas in the crisis period. The results also suggest that in case of the new EU members, the global risk factors are more significant than the local ones.