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operational risk sign in to follow this
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extreme value theory sign in to follow this
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sub-additivity sign in to follow this
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Operational Risk Quantification Using Extreme Value Theory and Copulas: From Theory to Practice
Year Of Publication: 2008
Month Of Publication: July
Pages: 30
Download Count: 28
View Count: 1976
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 8-27-2010
Publisher: Administrator
Summary
In this paper we point out several pitfalls of the standard methodologies for quantifying operational losses. Firstly, we use Extreme Value Theory to model real heavy-tailed data. We show that using the Value-at-Risk as a risk measure may lead to a mis-estimation of the capital requirements. In particular, we examine the issues of stability and coherence and relate them to the degree of heavy-tailedness of the data. Secondly, we introduce dependence between the business lines using Copula Theory. We show that standard economic thinking about diversification may be inappropriate when infinite-mean distributions are involved.
This document is published in Journal of Operational Risk (volume 4, number 3) Fall 2009, 3-26.
Author(s)
Abbate, Donato Sign in to follow this author
Farkas, Walter Sign in to follow this author
Gourier, Elise Sign in to follow this author
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