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An efficient threshold choice for operational risk capital computation

  • Dominique Guegan

    ()

    (Axe Finance - CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics)

  • Bertrand Hassani

    ()

    (Axe finance - CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - BPCE - BPCE)

  • Cédric Naud

    ()

    (AON - AON)

Operational risk quantification requires dealing with data sets which often present extreme values which have a tremendous impact on capital computations (VaR). In order to take into account these effects we use extreme value distributions to model the tail of the loss distribution function. We focus on the Generalized Pareto Distribution (GPD) and use an extension of the Peak-over-threshold method to estimate the threshold above which the GPD is fitted. This one will be approximated using a Bootstrap method and the EM algorithm is used to estimate the parameters of the distribution fitted below the threshold. We show the impact of the estimation procedure on the computation of the capital requirement - through the VaR - considering other estimation methods used in extreme value theory. Our work points also the importance of the building's choice of the information set by the regulators to compute the capital requirement and we exhibit some incoherence with the actual rules. Particularly, we highlight a problem arising from the granularity which has recently been mentioned by the Basel Committee for Banking Supervision.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00544342.

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Date of creation: Nov 2010
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Handle: RePEc:hal:cesptp:halshs-00544342
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00544342v2
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  1. Dominique Guegan & Bertrand K. Hassani, 2011. "A mathematical resurgence of risk management: an extreme modeling of expert opinions," Documents de travail du Centre d'Economie de la Sorbonne 11057, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
  3. Hall, Peter, 1990. "Using the bootstrap to estimate mean squared error and select smoothing parameter in nonparametric problems," Journal of Multivariate Analysis, Elsevier, vol. 32(2), pages 177-203, February.
  4. repec:hal:journl:halshs-00639666 is not listed on IDEAS
  5. 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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