This paper estimates the optimum level of reserves in Vietnam based on the approach of reserves’ cost-benefit and sovereign risk which is one of developing countries’ characteristics. The cost of reserves is the opportunity cost when holding reserves. The benefit of reserves is the loss due to country’s default in case that there is no reserves to finance external debt payment. The optimum reserves is found out by minimizing the total of opportunity cost and loss due to country’s default with the probability of default. Through the usage of HP Filter method for calculating the loss due to country’s default, ARDL regression for the risk premium model and lending rate of VND as proxy for opportunity cost together with the Vietnamese economic data in the period of 2005 – 2017, the empirical results show that the optimum reserves in Vietnam is almost higher than the actual reserves during the research period except the point of Q3/2008 and the last point of research period - Q4/2017. Therefore, Vietnam should continue to increase reserves for safety but Vietnam does not need pushing quickly the speed of increasing reserves. In addition, controlling Vietnamese optimum reserves is necessary to help the actual reserves become reasonable.

Abstract
1. Introduction
2. Literature Review
3. Research Methodology
    3.1. Theoretical Model
    3.2. Data
    3.3. Econometric Method
4. Results and Discussion
    4.1. Estimation of the Loss due to Country’sDefault
    4.2. Estimation of the Probability of Default
    4.3. Estimation of Marginal Probability ofDefault
    4.4. Estimation of Optimum Reserves inVietnam
5. Conclusions and Policy Implications
References

• Thinh Vuong TRAN(Faculty of Banking, Banking University Ho Chi Minh City) Corresponding Author.
• Thao Phan Thi Dieu LE(Faculty of Finance, Banking University Ho Chi Minh City)