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An Efficient Peak-over-Threshold Implementation for Operational Risk Capital Computation
Company: Centre d'Economie de la Sorbonne, University Paris 1
Company Url: Click here to open
Year Of Publication: 2010
Month Of Publication: November
Pages: 15
Download Count: 12
View Count: 2108
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 4-22-2011
Publisher: Administrator
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.
Guegan, Dominique Sign in to follow this author
Hassani, Bertrand Sign in to follow this author
Naud, Cédric Sign in to follow this author
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