Abstract/Description
This paper uses Black-Scholes-Merton model to quantitatively assess sovereign debt sustainability of Pakistan. Both the International Monetary Fund and Asian Development Bank have separately proposed applying Black Scholes-Merton model to calculate the sovereign default risk. Historically, the Black-Scholes Merton Model has been used to analyze corporate default risk. Both the sovereign and corporate default risk calculation are based on contingent claims approach which calculates risk by reading the sovereign and corporate balance sheets, respectively. Thus, in light of the proposition by these two financial bodies this paper calculates the default probability of Pakistan in 2001-2022. As the efficacy, it is shown that calculated default probability follows the trend of credit riskiness suggested by Moody’s credit ratings for the same period.
Location
MCC-15, AMAN-CED, Second Floor
Session Theme
2D: Inflation, Debt and Remittances
Session Type
Parallel Technical Session
Session Discussant
Zulfiqar Hyder, State Bank of Pakistan (SBP), Karachi
Start Date
17-11-2023 11:50 AM
End Date
17-11-2023 1:20 PM
Recommended Citation
Zaffar, S. (2023). Computational calculation of sovereign default probabilities: Pakistan's Case. CBER Conference. Retrieved from https://ir.iba.edu.pk/esdcber/2023/program/30
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Computational calculation of sovereign default probabilities: Pakistan's Case
MCC-15, AMAN-CED, Second Floor
This paper uses Black-Scholes-Merton model to quantitatively assess sovereign debt sustainability of Pakistan. Both the International Monetary Fund and Asian Development Bank have separately proposed applying Black Scholes-Merton model to calculate the sovereign default risk. Historically, the Black-Scholes Merton Model has been used to analyze corporate default risk. Both the sovereign and corporate default risk calculation are based on contingent claims approach which calculates risk by reading the sovereign and corporate balance sheets, respectively. Thus, in light of the proposition by these two financial bodies this paper calculates the default probability of Pakistan in 2001-2022. As the efficacy, it is shown that calculated default probability follows the trend of credit riskiness suggested by Moody’s credit ratings for the same period.
