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

See all articles by Hans BuŸhlmann

Hans BuŸhlmann

ETH Zurich - Department of Mathmatics

Pavel V. Shevchenko

Macquarie University; Macquarie University, Macquarie Business School

Mario V. Wuthrich

RiskLab, ETH Zurich

Date Written: April 18, 2007

Abstract

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

BuŸhlmann, Hans and Shevchenko, Pavel V. and Wuthrich, Mario V., A 'Toy' Model for Operational Risk Quantification Using Credibility Theory (April 18, 2007). The Journal of Operational Risk 2(1), pp. 3-19, 2007. Available at SSRN: https://ssrn.com/abstract=2529538

Hans BuŸhlmann

ETH Zurich - Department of Mathmatics ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Mario V. Wuthrich

RiskLab, ETH Zurich ( email )

Department of Mathematics
Ramistrasse 101
Zurich, 8092
Switzerland

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