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Estimation of operational value-at-risk in the presence of minimum collection threshold: An empirical study

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  • Chernobai, Anna
  • Menn, Christian
  • Rachev, Svetlozar T.
  • Trück, Stefan

Abstract

The recently finalized Basel II Capital Accord requires banks to adopt a procedure to estimate the operational risk capital charge. Under the Advanced Measurement Approaches, that are currently mandated for all large internationally active US banks, require the use of historic operational loss data. Operational loss databases are typically subject to a minimum recording threshold of roughly $10,000. We demonstrate that ignoring such thresholds leads to biases in corresponding parameter estimates when the threshold is ignored. Using publicly available operational loss data, we analyze the effects of model misspecification on resulting expected loss, Value-at-Risk, and Conditional Value-at-Risk figures and show that underestimation of the regulatory capital is a consequence of such model error. The choice of an adequate loss distribution is conducted via in-sample goodness-of-fit procedures and backtesting, using both classical and robust methodologies.

Suggested Citation

  • Chernobai, Anna & Menn, Christian & Rachev, Svetlozar T. & Trück, Stefan, 2010. "Estimation of operational value-at-risk in the presence of minimum collection threshold: An empirical study," Working Paper Series in Economics 4, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
  • Handle: RePEc:zbw:kitwps:4
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    Cited by:

    1. Feria-Domínguez, José Manuel & Jiménez-Rodríguez, Enrique & Sholarin, Ola, 2015. "Tackling the over-dispersion of operational risk: Implications on capital adequacy requirements," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 206-221.
    2. Chernobai, Anna & Burnecki, Krzysztof & Rachev, Svetlozar & Trueck, Stefan & Weron, Rafal, 2005. "Modelling catastrophe claims with left-truncated severity distributions (extended version)," MPRA Paper 10423, University Library of Munich, Germany.

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