Quantification of sovereign risk: Using the information in equity market prices

This paper proposes a new approach to quantify the sovereign risk. We use the information of the stock price index as a proxy for the equity value of the country, and introduce a size parameter, which is a conversion factor of the stock price index to the equity value of the country, and adopted the extended Black-Scholes-Merton option-pricing model for the calculation of the probability of default. Our model is applied on two countries, Argentina as the case of debt crisis and Thailand as currency crisis. We demonstrated a capability of our model as an early warning indicator for both crises.