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Estimation of Operational Risk Capital Charge under Parameter Uncertainty
Company: CSIRO Mathematical and Information Sciences
Year Of Publication: 2008
Month Of Publication: January
Pages: 14
Download Count: 190
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Comment Num: 0
Language: EN
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Who Can Read: Free
Date: 2-4-2009
Publisher: Administrator
Summary
Many banks adopt the Loss Distribution Approach to quantify the operational risk capitalcharge under Basel II requirements. It is common practice to estimate the capital chargeusing the 0.999 quantile of the annual loss distribution, calculated using point estimators ofthe frequency and severity distribution parameters. The uncertainty of the parameterestimates is typically ignored. One of the unpleasant consequences for the banksaccounting for parameter uncertainty is an increase in the capital requirement. This paperdemonstrates how the parameter uncertainty can be taken into account using a Bayesianframework that also allows for incorporation of expert opinions and external data into theestimation procedure.
Author(s)
Shevchenko, Pavel Sign in to follow this author
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