Modeling operational risk data reported above a time-varying threshold
Typically, operational risk losses are reported above a threshold. Fitting data reported above a constant threshold is a well known and studied problem. However, in practice, the losses are scaled for business and other factors before the fitting and thus the threshold is varying across the scaled data sample. A reporting level may also change when a bank changes its reporting policy. We present both the maximum likelihood and Bayesian Markov chain Monte Carlo approaches to fitting the frequency and severity loss distributions using data in the case of a time varying threshold. Estimation of the annual loss distribution accounting for parameter uncertainty is also presented.
|Date of creation:||Apr 2009|
|Date of revision:||Jul 2009|
|Publication status:||Published in The Journal of Operational Risk 4(2), pp. 19-42, 2009 www.journalofoperationalrisk.com|
|Contact details of provider:|| Web page: http://arxiv.org/|
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- 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.
- Marco Moscadelli, 2004. "The modelling of operational risk: experience with the analysis of the data collected by the Basel Committee," Temi di discussione (Economic working papers) 517, Bank of Italy, Economic Research and International Relations Area.
- Xiaolin Luo & Pavel V. Shevchenko, 2009. "Computing Tails of Compound Distributions Using Direct Numerical Integration," Papers 0904.0830, arXiv.org, revised Feb 2010.
- Gareth W. Peters & Pavel V. Shevchenko & Mario V. W\"uthrich, 2009. "Dynamic operational risk: modeling dependence and combining different sources of information," Papers 0904.4074, arXiv.org, revised Jul 2009.
- Pavel V. Shevchenko, 2009. "Implementing Loss Distribution Approach for Operational Risk," Papers 0904.1805, arXiv.org, revised Jul 2009.
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