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Multivariate VaRs for Operational Risk Capital Computation: a Vine Structure Approach

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  • Dominique Guegan

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Bertrand Hassani

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, AON - Aon Risk Solutions)

Abstract

The Basel Advanced Measurement Approach requires financial institutions to compute capital requirements on internal data sets. In this paper we introduce a new methodology permitting capital requirements to take into account the embedded dependence structures of operational risks. The loss distributions are provided in a matrix of 56 cells. Constructing a vine architecture, which is a bivariate decomposition of a n-dimensional structure (n > 2), we use this approach to compute multivariate operational risk VaRs. We analyse the results and compare them with classical methodologies based on LDF modelings. Our method is simple to carry out, easy to interpret and complies with the new Basel Committee requirements.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00587706.

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Date of creation: Apr 2012
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Handle: RePEc:hal:cesptp:halshs-00587706

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Related research

Keywords: Operational risks; vine copula; loss distribution function; nested structure; VaR;

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  1. repec:hal:cesptp:halshs-00348884 is not listed on IDEAS
  2. Dominique Guegan & Pierre-André Maugis, 2010. "An Econometric Study of Vine Copulas," Documents de travail du Centre d'Economie de la Sorbonne 10040, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  3. Dominique Guegan & Pierre-André Maugis, 2008. "New prospects on vines," Documents de travail du Centre d'Economie de la Sorbonne b08095, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Mar 2010.
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