What can one consider alleged corruption in a presidential election in an emerging market country or the change in finance minister in an emerging market country headline risk? (Headline risk was described in a prior chapter.)

Question

What will be an ideal response?

Answer 1

Headline risk refers to the possibility that a news story will adversely affect a stock's price. This type of risk can also impact the performance of the stock market as a whole. With respect to elections in an emerging market country, corruption factors to consider include the fairness of elections and the political opposition programs. An example of the immediate impact of these factors is provided by Loucks, Penicook, and Schillhorn. In the May 2000 presidential election in Peru, the incumbent, Alberto Fujimori, won the election. However, there were allegations of fraud. During the election period, the spread on Peruvian bonds increased by 200 basis points compared to the spread on a popular emerging bond market index. In early September 2000, it was found that Fujimori's top security advisor had paid opposition members in congress to switch sides. Shortly thereafter, Fujimori called for new presidential and parliamentary elections and renounced his power. After a series of other scandals associated with the top security advisory, in June 2001 presidential runoffs were held, with one of the candidates being Alan Garcia, former president of Peru. During his administration, he pushed Peru into a debt crisis in 1987 . Because of the uncertainty associated with his possible election to president, the spread on Peruvian bonds once again increased by 200 basis points relative to the same emerging bond market index.