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http://ssrn.com/abstract=1668939
 
 

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Treatment of the Data Collection Threshold in Operational Risk: A Case Study with the Lognormal Distribution


Alexander Cavallo


Northern Trust Corporation

Benjamin Rosenthal


Northern Trust Corporation

Xiao Wang


University of Connecticut - Department of Statistics

Jun Yan


University of Connecticut - Department of Statistics

February 1, 2012

The Journal of Operational Risk, Vol. 7, No. 1, Spring 2012.

Abstract:     
Among operational risk practitioners there is some confusion about the implications of the loss data collection threshold and the estimation of "truncated" or "shifted" distributions. Claims that "shifted" models result in biased parameter estimates rely on the premise that the "true" model is known to be "truncated" and do not objectively evaluate "shifted" distributions. We systematically analyze the performance of "shifted" and "truncated" lognormal models and illustrate the use of Vuong's LR test for model selection. We conclude that truncated and shifted lognormal models are equally valid or invalid approaches for estimating loss severity with a data collection threshold.

Number of Pages in PDF File: 33

Keywords: Operational risk, Regulatory capital, Loss distribution, Data truncation, Shifted distribution, Vuong's test, Severity distribution, Basel II

JEL Classification: C13, G20, G21, G32

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Date posted: August 31, 2010 ; Last revised: February 10, 2012

Suggested Citation

Cavallo, Alexander and Rosenthal, Benjamin and Wang, Xiao and Yan, Jun, Treatment of the Data Collection Threshold in Operational Risk: A Case Study with the Lognormal Distribution (February 1, 2012). The Journal of Operational Risk, Vol. 7, No. 1, Spring 2012.. Available at SSRN: http://ssrn.com/abstract=1668939 or http://dx.doi.org/10.2139/ssrn.1668939

Contact Information

Alexander Cavallo (Contact Author)
Northern Trust Corporation ( email )
50 South LaSalle Street
Chicago, IL 60603
United States
Benjamin L. Rosenthal
Northern Trust Corporation ( email )
50 South LaSalle Street
Chicago, IL 60603
United States
Xiao Wang
University of Connecticut - Department of Statistics ( email )
196 Auditorium Road, U-120
Storrs, CT 06269-3120
United States
Jun Yan
University of Connecticut - Department of Statistics ( email )
196 Auditorium Road, U-120
Storrs, CT 06269-3120
United States
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