The adverse effects of financial crises in terms of output losses or output growth below its potential can be treated like losses from catastrophic events which have a low likelihood but a large impact in the event that they occur. We therefore analyze GDP losses in terms of frequency (number of loss events per period) and severity (loss per occurrence). Crises' frequency, severity, and the associated global output losses over periods of five years are identified on the basis of Laeven et al. (2008). Applying the Loss Distribution Approach used in insurance and operational risk theory and practice, we estimate a multi-country aggregate GDP loss distribution and thus approximate the conditional losses in the event of financial crises. The analysis of losses produced in the paper suggests that the LDA approach is a useful tool in discussions about the existence and capital requirements of a potential insurance against the risk of financial crises at the aggregate level .
We study cross-country GDP losses due to financial crises in terms of frequency (number of loss events per period) and severity (loss per occurrence). We perform the Loss Distribution Approach (LDA) to estimate a multi-country aggregate GDP loss probability density function and the percentiles associated to extreme events due to financial crises. We find that output losses arising from financial crises are strongly heterogeneous and that currency crises lead to smaller output losses than debt and banking crises. Extreme global financial crises episodes, occurring with a one percent probability every five years, lead to losses between 2.95\% and 4.54\% of world GDP .
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The adverse effects of financial crises in terms of output losses or output growth below its potential can be treated like losses from catastrophic events which have a low likelihood but a large impact in the event that they occur. We therefore analyze GDP losses
We study cross-country GDP losses due to financial crises
R
Crises' frequency, severity, and the associated global output losses over periods of five years are identified on the basis of Laeven et al. (2008). Applying the
We perform the
R
used in insurance and operational risk theory and practice, we
(LDA) to
R
distribution and thus approximate the conditional losses in the event of
probability density function and the percentiles associated to extreme events due to
R
The analysis of losses produced in the paper suggests that the LDA approach is a useful tool in discussions about the existence and capital requirements of a potential insurance against the risk of financial crises at the aggregate level
We find that output losses arising from financial crises are strongly heterogeneous and that currency crises lead to smaller output losses than debt and banking crises. Extreme global financial crises episodes, occurring with a one percent probability every five years, lead to losses between 2.95\% and 4.54\% of world GDP