The shadow economy: a relevant factor for investment decisions in selected European Union countries

Abstract

The estimation of sovereign risk indicators has a key role for the investment decisions. We were witnesses of inaccurate ratings before the last economic crisis, which altered significantly the results expected by many investors. Thus, we propose an improved rating estimation justifying the insertion of new variables, specifically, the shadow economy as a percentage of the GDP. We find that by taking it into account, the credit rating estimation improves. Our estimation assigns a higher sovereign risk to the new European Union member states, whereas the old European Union member states see their sovereign risk decreased.