Calculation of aggregate loss distributions
AbstractEstimation of the operational risk capital under the Loss Distribution Approach requires evaluation of aggregate (compound) loss distributions which is one of the classic problems in risk theory. Closed-form solutions are not available for the distributions typically used in operational risk. However with modern computer processing power, these distributions can be calculated virtually exactly using numerical methods. This paper reviews numerical algorithms that can be successfully used to calculate the aggregate loss distributions. In particular Monte Carlo, Panjer recursion and Fourier transformation methods are presented and compared. Also, several closed-form approximations based on moment matching and asymptotic result for heavy-tailed distributions are reviewed.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1008.1108.
Date of creation: Aug 2010
Date of revision:
Publication status: Published in The Journal of Operational Risk 5(2), pp. 3-40, 2010. www.journalofoperationalrisk.com
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-14 (All new papers)
- NEP-BAN-2010-08-14 (Banking)
- NEP-CMP-2010-08-14 (Computational Economics)
- NEP-RMG-2010-08-14 (Risk Management)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Kensuke Ishitani & Kenichi Sato, 2013. "An Analytical Evaluation Method of the Operational Risk Using Fast Wavelet Expansion Techniques," Asia-Pacific Financial Markets, Springer, vol. 20(3), pages 283-309, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.