A 'Toy' Model for Operational Risk Quantification Using Credibility Theory
The Journal of Operational Risk 2(1), pp. 3-19, 2007
18 Pages Posted: 24 Nov 2014
Date Written: April 18, 2007
To meet the Basel II regulatory requirements for the Advanced Measurement Approaches in operational risk, the bank’s internal model should make use of the internal data, relevant external data, scenario analysis and factors reflecting the business environment and internal control systems. One of the unresolved challenges in operational risk is combining of these data sources appropriately. In this paper we focus on quantification of the low frequency high impact losses exceeding some high threshold. We suggest a full credibility theory approach to estimate frequency and severity distributions of these losses by taking into account bank internal data, expert opinions and industry data.
Keywords: quantitative risk management, operational risk, loss distribution approach, credibility theory, combining different data sources, Basel II Advanced Measurement Approaches
JEL Classification: C00, G00
Suggested Citation: Suggested Citation