Operational–risk Dependencies and the Determination of Risk Capital
AbstractWith the advent of Basel II, risk–capital provisions need to also account for operational risk. The specification of dependence structures and the assessment of their effects on aggregate risk–capital are still open issues in modeling operational risk. In this paper, we investigate the potential consequences of adopting the restrictive Basel’s Loss Distribution Approach (LDA), as compared to strategies that take dependencies explicitly into account. Drawing on a real–world database, we fit alternative dependence structures, using parametric copulas and nonparametric tail–dependence coefficients, and discuss the implications on the estimation of aggregate risk capital. We find that risk–capital estimates may increase relative to that derived for the LDA when accounting explicitly for the presence of dependencies. This phenomenon is not only be due to the (fitted) characteristics of the data, but also arise from the specific Monte Carlo setup in simulation–based risk–capital analysis.
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Bibliographic InfoPaper provided by University of Modena and Reggio E., Dept. of Economics in its series Center for Economic Research (RECent) with number 070.
Length: pages 35
Date of creation: Aug 2011
Date of revision:
Copula; Nonparametric Tail Dependence; Basel II; Loss Distribution Approach; Value–at–Risk; Subadditivity;
Find related papers by JEL classification:
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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ULB Institutional Repository
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