Country risk spillovers in the Middle East: A prelude to the road map for peace and the war on terror

Political upheavals in the Middle East are not uncommon. They include domestic conflicts, such as the Islamic revolution of Iran, and external hostilities, such as the Arab-Israeli wars. These events affect the perceptions of foreign investors who shy away from these countries since they seek stable environments for their moneys. While the effect of political risk events on foreign direct investment have been investigated by numerous researchers, the influence of one country's political occurrences on investors' perceptions of a neighboring country has been largely ignored. The purpose of this study is to investigate such an influence by examining the political risk spillovers between selected nations of the Middle East. Nations selected include Egypt, Iran Iraq, Israel, Jordan, Kuwait and Saudi Arabia. The paper finds that strong correlations exist in bankers' perceptions of country risk in these countries.