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Loss distribution estimation, external data and model averaging


  • Ethan Cohen-Cole
  • Todd Prono


This paper will discuss a proposed method for the estimation of loss distribution using information from a combination of internally derived data and data from external sources. The relevant context for this analysis is the estimation of operational loss distributions used in the calculation of capital adequacy. We present a robust, easy-to-implement approach that draws on Bayesian inferential methods. The principal intuition behind the method is to let the data itself determine how they should be incorporated into the loss distribution. This approach avoids the pitfalls of managerial choice on data weighting and cut-off selection and allows for the estimation of a single loss distribution.

Suggested Citation

  • Ethan Cohen-Cole & Todd Prono, 2007. "Loss distribution estimation, external data and model averaging," Risk and Policy Analysis Unit Working Paper QAU07-8, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbqu:qau07-8

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