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Operational Risk - Scenario Analysis

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  • Milan Rippel
  • Petr Teplý

Abstract

This paper focuses on operational risk measurement techniques and on economic capital estimation methods. A data sample of operational losses provided by an anonymous Central European bank is analyzed using several approaches. Multiple statistical concepts such as the Loss Distribution Approach and the Extreme Value Theory, including scenario analysis method, are considered. Custom plausible loss events defined in a particular scenario are merged with the original data sample and their impact on capital estimates and on the financial institution as a whole is evaluated. Two main questions are assessed - what is the most appropriate statistical method to measure and model operational loss data distribution and what is the impact of hypothetical plausible events on the financial institution. The g&h distribution was evaluated to be the most suitable one for operational risk modeling. The method based on the combination of historical loss events modeling and scenario analysis provides reasonable capital estimates and allows for the measurement of the impact of very extreme events on banking operations.

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Bibliographic Info

Article provided by University of Economics, Prague in its journal Prague Economic Papers.

Volume (Year): 2011 (2011)
Issue (Month): 1 ()
Pages: 23-39

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Handle: RePEc:prg:jnlpep:v:2011:y:2011:i:1:id:385:p:23-39

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Related research

Keywords: stress testing; scenario analysis; operational risk; loss distribution approach; extreme value theory; economic capital;

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References

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  1. Radovan Chalupka & Petr Teply, 2008. "Operational Risk Management and Implications for Bank’s Economic Capital – a Case Study," Working Papers IES 2008/17, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Sep 2008.
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Cited by:
  1. Milan Rippel & Lucie Suchánková & Petr Teplý, 2012. "The Role of Insurance in Operational Risk Mitigation - A Case Study," Politická ekonomie, University of Economics, Prague, vol. 2012(4), pages 523-535.

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