Correlation research of country risk based on mutual information

Correlation of country risk between different countries has been a crucial inuencing factor for worldwide investment strategy and international capital ow. Given this, identifying the correlation char- acteristics is of great importance. In this paper, mutual information is introduced based on the information entropy theory to construct globalized correlation, which will be used to depict the complex correlation relationship between different countries' country risk. Further, a "multi-phase & multi-elements " frame is proposed and correlation characteristic differences before and after financial crisis in 2007 for political/economic/financial risk are given respectively. BRICS countries are selected as the sample countries, and results as follows are obtained. For composite country risk, after the crisis correlation between the five countries changes obviously compared with its behavior before the financial crisis. Even if correlation of composite country risk changes in the same way, the correlation characteristics for different country risk elements may also behave differently. Results obtained in this paper can not only help international investors avoiding lost coming from country risk, but also offer guidance for international trade and investment.