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Real output costs of financial crises: a loss distribution approach

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  • Kapp, Daniel
  • Vega, Marco

Abstract

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 and Valencia(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.

Suggested Citation

  • Kapp, Daniel & Vega, Marco, 2012. "Real output costs of financial crises: a loss distribution approach," MPRA Paper 35706, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:35706
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    References listed on IDEAS

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    Cited by:

    1. Boris Vujcic & Mirna Dumicic, 2016. "Managing systemic risks in the Croatian economy," BIS Papers chapters,in: Bank for International Settlements (ed.), Macroprudential policy, volume 86, pages 75-84 Bank for International Settlements.
    2. Emilia-Ancuta Corovei, 2015. "Real Output Costs of Financial Crisis on CEE Countries," Knowledge Horizons - Economics, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 7(1), pages 80-84, March.
    3. Tolga Umut Kuzubas & Burak Saltoglu & Can Sever, 2014. "Systemic Risk and Heterogeneous Leverage in Banking Network: Implications for Banking Regulation," Working Papers 2014/01, Bogazici University, Department of Economics.
    4. Aizenman, Joshua & Ito, Hiro, 2014. "Living with the trilemma constraint: Relative trilemma policy divergence, crises, and output losses for developing countries," Journal of International Money and Finance, Elsevier, vol. 49(PA), pages 28-51.
    5. Iustina Alina Boitan, 2015. "Output Loss Severity across EU Countries. Evidence for the 2008 Financial Crisis," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 11(4), pages 117-126, August.
    6. Sever, Can, 2014. "Systemic Liquidity Crisis with Dynamic Haircuts," MPRA Paper 55602, University Library of Munich, Germany.
    7. Boonman, Tjeerd M., 2013. "Sovereign defaults, business cycles and economic growth in Latin America, 1870-2012," Research Report 13010-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).

    More about this item

    Keywords

    Financial Crisis; Severity; Frequency; LDA;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G01 - Financial Economics - - General - - - Financial Crises

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