Measuring Exposure to Downside Risk with an Application to Thailand and Vietnam

In this paper we propose a new measure of exposure to downside risk. Its reference point is the current standard of living of a household as opposed to other benchmarks such as the poverty line in the case of measures of vulnerability. Using panel data from Thailand and Vietnam we develop an empirical approach to quantify our measure. More precisely, we predict truly forward looking probabilities and deprivation indices of different states of the world and aggregate them to country specific measures of exposure to downside risk. We scrutinize the correlates of these measures in the periods 2007–08 and 2008–09 using regressions with household fixed effects. We examine vulnerability to poverty and “hybrid” vulnerability to poverty in an identical empirical framework. This allows us to draw conclusions with respect to the value added of our new measure. We find that the measure of exposure to downside risk indeed offers complimentary information that may be relevant from a policy perspective and recommend to incorporate its appraisal in holistic assessments of vulnerability and risk exposure.