Internal Data, External Data and Consortium Data - How to Mix Them for Measuring Operational Risk

18 Pages Posted: 26 Nov 2007

See all articles by Nicolas Baud

Nicolas Baud

affiliation not provided to SSRN

Antoine Frachot

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Thierry Roncalli

Amundi Asset Management; University of Evry

Date Written: June 1, 2002

Abstract

It is widely recognized that calibration on internal data may not suffice for computing an accurate capital charge against operational risk. However, pooling external and internal data lead to unacceptable capital charges as external data are generally skewed toward large losses. In a previous paper, we have developped a statistical methodology to ensure that merging both internal and external data leads to unbiased estimates of the loss distribution. This paper shows that this methodology is applicable in real - life risk management and that it permits to pool internal and external data together in an appropriate way. The paper is organized as follows. We first discuss how external databases are designed and how their design may result in statistical flaws. Then we develop a model for the data generating process which underlies external data. In this model, the bias comes simply from the fact that external data are truncated above a specific threshold while this threshold may be either constant but known, or constant but unknown, or finally stochastic. We describe the rationale behind these three cases and we provide for each of them a methodology to circumvent the related bias. In each case, numerical simulations and practical evidences are given.

Keywords: Operational risk, internal data, external data, consortium data, threshold.

JEL Classification: G00

Suggested Citation

Baud, Nicolas and Frachot, Antoine and Roncalli, Thierry, Internal Data, External Data and Consortium Data - How to Mix Them for Measuring Operational Risk (June 1, 2002). Available at SSRN: https://ssrn.com/abstract=1032529 or http://dx.doi.org/10.2139/ssrn.1032529

Nicolas Baud

affiliation not provided to SSRN

No Address Available

Antoine Frachot

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Thierry Roncalli (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

University of Evry ( email )

Boulevard Francois Mitterrand
F-91025 Evry Cedex
France

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
534
Abstract Views
3,351
rank
54,990
PlumX Metrics