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Flexible dependence modeling of operational risk losses and its impact on total capital requirements

Listed author(s):
  • Brechmann, Eike
  • Czado, Claudia
  • Paterlini, Sandra
Registered author(s):

    Operational risk data, when available, are usually scarce, heavy-tailed and possibly dependent. In this work, we introduce a model that captures such real-world characteristics and explicitly deals with heterogeneous pairwise and tail dependence of losses. By considering flexible families of copulas, we can easily move beyond modeling bivariate dependence among losses and estimate the total risk capital for the seven- and eight-dimensional distributions of event types and business lines. Using real-world data, we then evaluate the impact of realistic dependence modeling on estimating the total regulatory capital, which turns out to be up to 38% smaller than what the standard Basel approach would prescribe.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426613004615
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 40 (2014)
    Issue (Month): C ()
    Pages: 271-285

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    Handle: RePEc:eee:jbfina:v:40:y:2014:i:c:p:271-285
    DOI: 10.1016/j.jbankfin.2013.11.040
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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    4. Brechmann, Eike Christian & Schepsmeier, Ulf, 2013. "Modeling Dependence with C- and D-Vine Copulas: The R Package CDVine," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 52(i03).
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    15. Stefan Mittnik & Sandra Paterlini & Tina Yener, 2011. "Operational–risk Dependencies and the Determination of Risk Capital," Center for Economic Research (RECent) 070, University of Modena and Reggio E., Dept. of Economics "Marco Biagi".
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