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A mathematical resurgence of risk management: an extreme modeling of expert opinions

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Abstract

The Operational Risk Advanced Measurement Approach requires financial institutions to use scenarios to model these risks and to evaluate the pertaining capital charges. Considering that a banking group is composed of numerous entities (branches and subsidiaries), and that each one of them is represented by an Operational Risk Manager (ORM), we propose a novel scenario approach based on ORM expertise to collect information and create new data sets focusing on large losses, and the use of the Extreme Value Theory (EVT) to evaluate the corresponding capital allocation. In this paper, we highlight the importance to consider an a priori knowledge of the experts associated to a a posteriori backtesting based on collected incidents

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  • 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.
  • Handle: RePEc:mse:cesdoc:11057
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    File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2011/11057.pdf
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    1. Dominique Guegan & Bertrand K. Hassani, 2011. "Operational risk: A Basel II++ step before Basel III," Documents de travail du Centre d'Economie de la Sorbonne 11053r, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Mar 2012.
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    Cited by:

    1. Dominique Guegan & Bertrand Hassani & Cédric Naud, 2010. "An efficient threshold choice for operational risk capital computation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00544342, HAL.
    2. Klaus Herrmann & Marius Hofert & Melina Mailhot, 2017. "Multivariate Geometric Expectiles," Papers 1704.01503, arXiv.org, revised Jan 2018.

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    Keywords

    Basel II; operational risks; EVT; AMA; expert; Value-at-Risk; excepted shortfall;

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General

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