Hi Guys,
The country risk premium is calculated as the product of the sovereign yield spread and the ratio of the volatility of the developing country equity market to that of the sovereign bond market denominated in terms of the currency of a developed country
can someone explain the logic of what that ratio would mean (refer only the part in bolds)?
Greetings friend! I believe the rationale is the following, I will defer to others if they have a better explanation:
If the country’s local stock market is far more volatile than its sovereign bond market, investors should require a higher country risk premium to invest in the country’s equity market compared to the bond market. What the end part of the bold text is saying is that the sovereign bonds you use in the ratio’s denominator should be Eurobonds (denominated in dollars or euros or some other country deemed with no default risk). If the sovereign bonds are denominated in the local currency, you are only getting intra-country risk you’re not getting a full picture of the country risk versus a default-free baseline comparison.
Does this help?
Cheers - good luck - you got this 
Thanks a lot. Cheers