Correspondence: Mahmoud Haddad, College of Business and Public Affairs, University of Tennessee-Martin, Martin, TN 38238-5051, USA. Tel: +1 731 881 7249; Fax: +1 731 881 7241; E-mail: mhaddad@utm.edu, web: http://www.utm.edu/~mhaddad

¹Mahmoud Haddad is a professor of Finance at the College of Business and Public Affairs, University of Tennessee, Martin. He has published over 25 papers in leading refereed journals. He was the Financial and Accounting Manager at the American Family Insurance Co., the Executive Director of Research at the Palestinian Monetary Authority, the Vice President for Administrative and Financial Affairs and Dean of College of Business and Financial Sciences at the Arab American University, and a research scholar and Head of Economic and Social Studies Division at the Emirates Center for Strategic Studies and Research.

²Sam Hakim is a vice president of Risk Management at the Energetix in Los Angeles. He is concurrently an adjunct professor of Finance at the Pepperdine University in Malibu, California. He is the author of more than 40 articles and publications. He is an Ayres fellow with the American Bankers Association in Washington, DC, and a fellow with the Economic Research Forum. He holds a PhD degree in Economics from the University of Southern California.

Received 4 May 2008; Revised 4 May 2008.

Abstract

The prolonged war in Iraq, the political turmoil in Lebanon, the heightened tension between the Israelis and the Palestinians, and the spectre of an attack on Iran have significantly increased business uncertainty in several countries in the Middle East and North Africa (MENA). Sovereign risk — the credit risk assessment to the obligations of central governments — is believed to have increased. In response, credit rating agencies like Moody's and Standard and Poor's have revised their ratings or placed specific countries on their watch lists, a move that normally precedes a credit rating change. Using data from Morgan Stanley and Euromoney, we propose to quantify and explain the variability of sovereign risk in five MENA countries and two control countries between 2002 and 2006 using a set of dates in which a tragic event has taken place. Our methodology will allow us to test the extent to which the heightened political tension in the Middle East has altered the risk profiles of these countries and to challenge the assumptions made by rating agencies.