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Operational-risk Dependencies and the Determination of Risk Capital
Company: Center for Quantitative Risk Analysis, Ludwig-Maximilian University München
Company Url: Click here to open
Year Of Publication: 2011
Month Of Publication: August
Pages: 35
Download Count: 10
View Count: 1636
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 9-3-2011
Publisher: Administrator
With the advent of Basel II, risk-capital provisions need to also account for operational risk. The specification of dependence structures and the assessment of their effects on aggregate risk-capital are still open issues in modeling operational risk. In this paper, we investigate the potential consequences of adopting the restrictive Basel's Loss Distribution Approach (LDA), as compared to strategies that take dependencies explicitly into account. Drawing on a real-world database, we fit alternative dependence structures, using parametric copulas and nonparametric tail-dependence coefficients, and discuss the implications on the estimation of aggregate risk capital. We find that risk-capital estimates may increase relative to that derived for the LDA when accounting explicitly for the presence of dependencies. This phenomenon is not only be due to the (fitted) characteristics of the data, but also arise from the specific Monte Carlo setup in simulation-based risk-capital analysis.
Mittnik, Stefan Sign in to follow this author
Paterlini, Sandra Sign in to follow this author
Yener, Tina Sign in to follow this author
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