Modeling Dependence of Operational Loss Frequencies

16 Pages Posted: 27 Oct 2013

See all articles by Eike Brechmann

Eike Brechmann

Technische Universität München (TUM)

Claudia Czado

Technische Universität München (TUM)

Sandra Paterlini

University of Trento - Department of Economics and Management

Date Written: October 24, 2013

Abstract

Modeling dependence among operational loss frequencies is a natural way of trying to capture possible relationships between losses, which are categorized differently with respect to the business line or the event type, but which have occurred simultaneously.

We propose a model that explicitly accounts for such dependence and allows modeling it in a heterogeneous way to capture the wide spectrum of dependence structures operational losses exhibit.

Our model relies on a pair copula construction, which flexibly combines different bivariate copulas, to estimate efficiently the joint multivariate distribution and then determine the total risk capital.

Empirical results on real-world data show that such flexible explicit dependence modeling might have a significant impact on the risk capital, leading to a clear diversification benefit compared to the standard Basel comonotonicity assumption.

Keywords: operational risk, dependence modeling, pair copula construction, loss frequencies

JEL Classification: C1, C5, C30

Suggested Citation

Brechmann, Eike and Czado, Claudia and Paterlini, Sandra, Modeling Dependence of Operational Loss Frequencies (October 24, 2013). Available at SSRN: https://ssrn.com/abstract=2345342 or http://dx.doi.org/10.2139/ssrn.2345342

Eike Brechmann

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, 80333
Germany

Claudia Czado

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, 80333
Germany

Sandra Paterlini (Contact Author)

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
155
Abstract Views
750
rank
189,002
PlumX Metrics