A tale of tails: an empirical analysis of loss distribution models for estimating operational risk capital

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A tale of tails: an empirical analysis of loss distribution models for estimating operational risk capital

Author Info

Kabir Dutta
Jason Perry

Abstract

Operational risk is being considered as an important risk component for financial institutions as evinced by the large sums of capital that are allocated to mitigate this risk. Therefore, risk measurement is of paramount concern for the purposes of capital allocation, hedging, and new product development for risk mitigation. We perform a comprehensive evaluation of commonly used methods and introduce new techniques to measure this risk with respect to various criteria. We find that our newly introduced techniques perform consistently better than the other models we tested.

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Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 06-13.

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Date of creation: 2006
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Handle: RePEc:fip:fedbwp:06-13

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Keywords: Risk management;

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This paper has been announced in the following NEP Reports:

NEP-ALL-2006-09-16 (All new papers)
NEP-FMK-2006-09-16 (Financial Markets)
NEP-RMG-2006-09-16 (Risk Management)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Kenneth A. Froot, 2001. "Bank capital and risk management: operational risks in context," Conference Series ; [Proceedings], Federal Reserve Bank of Boston. [Downloadable!]
Bookstaber, Richard M & McDonald, James B, 1987. "A General Distribution for Describing Security Price Returns," Journal of Business, University of Chicago Press, vol. 60(3), pages 401-24, July. [Downloadable!] (restricted)
Kabir K. Dutta & David F. Babbel, 2002. "On Measuring Skewness and Kurtosis in Short Rate Distributions: The Case of the US Dollar London Inter Bank Offer Rates," Center for Financial Institutions Working Papers 02-25, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
Badrinath, S G & Chatterjee, Sangit, 1988. "On Measuring Skewness and Elongation in Common Stock Return Distributions: The Case of the Market Index," Journal of Business, University of Chicago Press, vol. 61(4), pages 451-72, October. [Downloadable!] (restricted)

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