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Estimation of Operational Value-at-Risk in the Presence of Minimum Collection Thresholds: An Empirical Study
Company: Karlsruher Institut für Technologie
Year Of Publication: 2010
Month Of Publication: August
Pages: 41
Download Count: 20
View Count: 2085
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 10-12-2010
Publisher: Administrator
Summary
The recently finalized Basel II Capital Accord requires banks to adopt a procedure to estimate the operational risk capital charge. Under the Advanced Measurement Approaches, that are currently mandated for all large internationally active US banks, require the use of historic operational loss data. Operational loss databases are typically subject to a minimum recording threshold of roughly $10,000. We demonstrate that ignoring such thresholds leads to biases in corresponding parameter estimates when the threshold is ignored. Using publicly available operational loss data, we analyze the effects of model misspecification on resulting expected loss, Value-at-Risk, and Conditional Value-at-Risk figures and show that underestimation of the regulatory capital is a consequence of such model error. The choice of an adequate loss distribution is conducted via in-sample goodness-of-fit procedures and backtesting, using both classical and robust methodologies.
Author(s)
Chernobai, Anna Sign in to follow this author
Menn, Christian Sign in to follow this author
Rachev, Svetlozar Sign in to follow this author
Trueck, Stefan Sign in to follow this author
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