Post by Sapphire Capital on Aug 20, 2008 0:02:11 GMT 4
Operational Risk Quantification Using Extreme Value Theory and Copulas: From Theory to Practice
Donato Abbate
affiliation not provided to SSRN
Walter Farkas
University of Zurich - Swiss Banking Institute (ISB)
Elise Gourier
Deloitte AG
July 15, 2008
Abstract:
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1160167_code515521.pdf?abstractid=1160167&mirid=2
Donato Abbate
affiliation not provided to SSRN
Walter Farkas
University of Zurich - Swiss Banking Institute (ISB)
Elise Gourier
Deloitte AG
July 15, 2008
Abstract:
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1160167_code515521.pdf?abstractid=1160167&mirid=2