What is 'Macro Risk'

Macro risk is a type of political risk in which political actions in a host country can adversely affect all foreign operations. Macro risk can come about from events that may or may not be in the reigning government's control.


As an example of macro risk, any company that engages in foreign direct investment in a country that is on the verge of switching to an anti-foreigner slanted government would be facing tremendous macro risk, because the government is likely to expropriate any and all foreign operations, regardless of industry. There are many organizations that provide reports and information on the degree of political risk that a country may possess. Furthermore, companies have the opportunity to purchase political risk insurance from a variety of organizations in order to mitigate potential losses.

Macro risk can refer to economic or financial risk found in stocks and funds, to political risk found in different countries and to the impact of economic or financial variables on political risk. Macro risk can also refer to various economic factors that influence the volatility of investments, assets, portfolios, and the intrinsic value of companies.

Macro risk is both a short- and long-term concern for financial planners, securities traders and investors. Some of the macroeconomic factors that can influence macro risk include unemployment rates, price indexes, monetary policy variables, interest rates, exchange rates, housing starts, agricultural exports and even commodity prices. Macro risk a factor for stock traders and institutions that focus on short-term changes that impact stock returns. These models include the arbitrage pricing theory and the modern portfolio theory families of models. Valuation models and closely related fundamental analysis models also consider macro risk. These models are favorites of wealth managers, financial planners and some institutional investors with long-term views of the market. These models are examples of intrinsic value analysis. In such analysis, forecasts of future company earnings are used to estimate the current and expected value of the investment being studied. Macro risk factors include any economic variables that are used to construct these estimates.

Understanding how macro risk influences the intrinsic value of a particular investment is important because when the factors change values, errors can be introduced in the corresponding intrinsic value forecasts.

Macro Risk and International Investment

Investors also look at macro risk to gauge the political stability and general growth opportunities possible in other countries. Investors can take action either by investing directly into a country or by investing into regionally oriented funds. Macro risk also carries ramifications for credit default swaps and other sophisticated financial products. International rankings of countries, often updated annually, provide insight into their relative political and social stability and economic growth.

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