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A Piecewise-Defined Severity Distribution-Based Loss Distribution Approach to Estimate Operational Risk: Evidence from Chinese National Commercial Banks
Company: International Journal of Information Technology & Decision Making
Company Url: Click here to open
Year Of Publication: 2009
Month Of Publication: December
Resource Link: Click here to open
Pages: 727-747
Download Count: 0
View Count: 1462
Comment Num: 0
Language: English
Source: book chapter
Who Can Read: Free
Date: 9-16-2012
Publisher: Administrator
Summary
Following the Basel II Accord, with the increased focus on operational risk as an aspect distinct from credit and market risk, quantification of operational risk has been a major challenge for banks. This paper analyzes implications of the advanced measurement approach to estimate the operational risk. When modeling the severity of losses in a realistic manner, our preliminary tests indicate that classic distributions are unable to fit the entire range of operational risk data samples (collected from public information sources) well. Then, we propose a piecewise-defined severity distribution (PSD) that combines a parameter form for ordinary losses and a generalized Pareto distribution (GPD) for large losses, and estimate operational risk by the loss distribution approach (LDA) with Monte Carlo simulation. We compare the operational risk measured with piecewise-defined severity distribution based LDA (PSD-LDA) with those obtained from the basic indicator approach (BIA), and the ratios of operational risk regulatory capital of some major international banks with those of Chinese commercial banks. The empirical results reveal the ratio
Author(s)
Li, Jianping Sign in to follow this author
Feng, Jichuang Sign in to follow this author
Chen, Jianming Sign in to follow this author
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