Measuring downside risk and severity for global output

This paper attempts to provide a critical measure of downside risk and severity for global output by applying the Value at Risk approach to four country groups in the world as a 'portfolio'. Global output downside risk, measured by global Growth at Risk (GaR), estimates the worst possible growth decline, relative to the baseline projection, with a specified probability over a given time horizon. This measure serves as a practical summary for predicting the risk for output downturn given a one-year time horizon, based on the past growth distribution of individual countries and correlation among their growth rates. Our empirical estimates show that the downside risk that the world economy faced in 2002 was not as severe as the last global downturn in 1992-1993. In particular, the global GaR estimates that the worst outcome of the global economy in 2002, at 95% confidence level, was a growth rate of 0.34%. Copyright © 2007 John Wiley & Sons, Ltd.