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Scaling models for the severity and frequency of external operational loss data

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  • Dahen, Hela
  • Dionne, Georges

Abstract

According to Basel II criteria, the use of external data is indispensable to the implementation of an advanced method for calculating operational risk capital. This article investigates how the severity and frequencies of external losses are scaled for integration with internal data. We set up an initial model designed to explain the loss severity by taking into account potential selection bias in the external data. Estimation results show that many variables have significant power in explaining the loss amount. We use them to develop a normalization formula. We develop a zero-inflated count-data model to scale the loss frequency. We compute an operational VaR and we conduct out-of-sample backtesting.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 7 (July)
Pages: 1484-1496

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:7:p:1484-1496

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Web page: http://www.elsevier.com/locate/jbf

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Keywords: Operational risk in banks External operational losses Frequency distribution Zero-inflated count-data models Selection model;

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Cited by:
  1. Colletaz, Gilbert & Hurlin, Christophe & Pérignon, Christophe, 2013. "The Risk Map: A new tool for validating risk models," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3843-3854.
  2. Jose Manuel Feria-Dominguez & Enrique Jimenez-Rodriguez & Pilar Camacho-Rubio, 2014. "People Value at Risk: A Key Indicator for Sound Management," Working Papers 14.03, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
  3. Rangga Handika & Chi Truong & Stefan Trueck & Rafal Weron, 2014. "Modelling price spikes in electricity markets - the impact of load, weather and capacity," HSC Research Reports HSC/14/08, Hugo Steinhaus Center, Wroclaw University of Technology.
  4. Fiordelisi, Franco & Soana, Maria-Gaia & Schwizer, Paola, 2013. "The determinants of reputational risk in the banking sector," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1359-1371.
  5. Cope, Eric W. & Piche, Mark T. & Walter, John S., 2012. "Macroenvironmental determinants of operational loss severity," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1362-1380.

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