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Flexible Dependence Modeling of Operational Risk Losses and Its Impact on Total Capital Requirements
Year Of Publication: 2013
Month Of Publication: March
Pages: 27
Download Count: 8
View Count: 1368
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 3-27-2013
Publisher: Administrator
Summary
Operational risk data, when available, are usually scarce, heavy-tailed and possibly dependent. In this work, we introduce a model that captures such real-world characteristics and explicitly deals with heterogeneous pairwise and tail dependence of losses. By considering flexible families of copulas, we can easily move beyond modeling bivariate dependence among losses and estimate the total risk capital for the seven- and eight-dimensional distributions of event types and business lines. Using real-world data, we then evaluate the impact of realistic dependence modeling on estimating the total regulatory capital, which turns out to be, as often expected, up to 38% smaller than what the standard Basel approach would prescribe.
Author(s)
Brechmann, Elke C. Sign in to follow this author
Czado, Claudia Sign in to follow this author
Paterlini, Sandra Sign in to follow this author
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