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Dynamic operational risk: modeling dependence and combining different sources of information

Author

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  • Gareth W. Peters
  • Pavel V. Shevchenko
  • Mario V. Wuthrich

Abstract

In this paper, we model dependence between operational risks by allowing risk profiles to evolve stochastically in time and to be dependent. This allows for a flexible correlation structure where the dependence between frequencies of different risk categories and between severities of different risk categories as well as within risk categories can be modeled. The model is estimated using Bayesian inference methodology, allowing for combination of internal data, external data and expert opinion in the estimation procedure. We use a specialized Markov chain Monte Carlo simulation methodology known as Slice sampling to obtain samples from the resulting posterior distribution and estimate the model parameters.

Suggested Citation

  • Gareth W. Peters & Pavel V. Shevchenko & Mario V. Wuthrich, 2009. "Dynamic operational risk: modeling dependence and combining different sources of information," Papers 0904.4074, arXiv.org, revised Jul 2009.
  • Handle: RePEc:arx:papers:0904.4074
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    File URL: http://arxiv.org/pdf/0904.4074
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    References listed on IDEAS

    as
    1. Pavel V. Shevchenko, 2009. "Implementing Loss Distribution Approach for Operational Risk," Papers 0904.1805, arXiv.org, revised Jul 2009.
    2. Xiaolin Luo & Pavel V. Shevchenko, 2009. "Computing Tails of Compound Distributions Using Direct Numerical Integration," Papers 0904.0830, arXiv.org, revised Feb 2010.
    3. Brewer, M. J. & Aitken, C. G. G. & Talbot, M., 1996. "A comparison of hybrid strategies for Gibbs sampling in mixed graphical models," Computational Statistics & Data Analysis, Elsevier, vol. 21(3), pages 343-365, March.
    4. repec:spr:compst:v:69:y:2009:i:3:p:497-508 is not listed on IDEAS
    5. Chavez-Demoulin, V. & Embrechts, P. & Neslehova, J., 2006. "Quantitative models for operational risk: Extremes, dependence and aggregation," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2635-2658, October.
    6. Frachot, Antoine & Roncalli, Thierry & Salomon, Eric, 2004. "The Correlation Problem in Operational Risk," MPRA Paper 38052, University Library of Munich, Germany.
    7. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    8. Lindskog, Filip & McNeil, Alexander J., 2003. "Common Poisson Shock Models: Applications to Insurance and Credit Risk Modelling," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 33(02), pages 209-238, November.
    9. Panjer, Harry H., 1981. "Recursive Evaluation of a Family of Compound Distributions," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 12(01), pages 22-26, June.
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    Citations

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    Cited by:

    1. Gareth W. Peters & Pavel V. Shevchenko & Bertrand Hassani & Ariane Chapelle, 2016. "Should the advanced measurement approach be replaced with the standardized measurement approach for operational risk?," Papers 1607.02319, arXiv.org, revised Sep 2016.
    2. Martel-Escobar, M. & Hernández-Bastida, A. & Vázquez-Polo, F.J., 2012. "On the independence between risk profiles in the compound collective risk actuarial model," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 82(8), pages 1419-1431.
    3. Gareth W. Peters & Pavel V. Shevchenko & Bertrand K. Hassani & Ariane Chapelle, 2016. "Should the advanced measurement approach be replaced with the standardized measurement approach for operational risk?," Documents de travail du Centre d'Economie de la Sorbonne 16065, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    4. Pavel V. Shevchenko, 2009. "Implementing Loss Distribution Approach for Operational Risk," Papers 0904.1805, arXiv.org, revised Jul 2009.
    5. Targino, Rodrigo S. & Peters, Gareth W. & Shevchenko, Pavel V., 2015. "Sequential Monte Carlo Samplers for capital allocation under copula-dependent risk models," Insurance: Mathematics and Economics, Elsevier, vol. 61(C), pages 206-226.
    6. Peters, Gareth W. & Byrnes, Aaron D. & Shevchenko, Pavel V., 2011. "Impact of insurance for operational risk: Is it worthwhile to insure or be insured for severe losses?," Insurance: Mathematics and Economics, Elsevier, vol. 48(2), pages 287-303, March.
    7. repec:hur:ijaraf:v:8:y:2018:i:1:p:153-160 is not listed on IDEAS
    8. Peters, Gareth W. & Shevchenko, Pavel V. & Young, Mark & Yip, Wendy, 2011. "Analytic loss distributional approach models for operational risk from the α-stable doubly stochastic compound processes and implications for capital allocation," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 565-579.
    9. repec:eee:phsmap:v:516:y:2019:i:c:p:327-339 is not listed on IDEAS
    10. repec:rsr:supplm:v:65:y:2017:i:11:p:102-107 is not listed on IDEAS
    11. Gareth Peters & Pavel Shevchenko & Bertrand Hassani & Ariane Chapelle, 2016. "Should the advanced measurement approach be replaced with the standardized measurement approach for operational risk?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01391091, HAL.
    12. Pavel V. Shevchenko & Grigory Temnov, 2009. "Modeling operational risk data reported above a time-varying threshold," Papers 0904.4075, arXiv.org, revised Jul 2009.

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