Dynamic Operational Risk: Modeling Dependence and Combining Different Sources of Information
The Journal of Operational Risk 4(2), pp. 69-104, 2009
47 Pages Posted: 23 Nov 2014
Date Written: April 11, 2009
In this paper, we model dependence between operational risks by allowing risk profiles to evolve stochastically in time and to be dependent. This allows for a flexible correlation structure where the dependence between frequencies of different risk categories and between severities of different risk categories as well as within risk categories can be modeled. The model is estimated using Bayesian inference methodology, allowing for combination of internal data, external data and expert opinion in the estimation procedure. We use a specialized Markov chain Monte Carlo simulation methodology known as Slice sampling to obtain samples from the resulting posterior distribution and estimate the model parameters.
Keywords: dependence modelling, copula, compound process, operational risk, Bayesian inference, Markov chain Monte Carlo, Slice sampling.
JEL Classification: C00, G00
Suggested Citation: Suggested Citation