Truncated Lognormals as a Power Law Mimicry in Operational Risk

12 Pages Posted: 30 Dec 2014

See all articles by Roberto Torresetti

Roberto Torresetti

Università degli Studi di Milano; Intesa SanPaolo

Claudio Nordio

illimity bank

Date Written: December 19, 2014

Abstract

Real operational loss data exhibit in some cases power laws on a wide part of the tail distributions, with sharp deviations far on the right suggesting they decrease to zero faster at infinity. Taking into account such deviations when modelling operational risk leads to great differences in VaR estimates, stemming from different asymptotic distribution of extreme events. We make use of the power law mimicry properties of Truncated Lognormal distribution and show how they fit operational risk data considerably well in these cases. For the few exceptions we show how a mixture of Truncated Lognormals can pass the goodness of fit test.

Suggested Citation

Torresetti, Roberto and Nordio, Claudio, Truncated Lognormals as a Power Law Mimicry in Operational Risk (December 19, 2014). Available at SSRN: https://ssrn.com/abstract=2543767 or http://dx.doi.org/10.2139/ssrn.2543767

Roberto Torresetti (Contact Author)

Università degli Studi di Milano ( email )

via Festa del Perdono, 7
Milano
Italy

Intesa SanPaolo ( email )

Milan
Italy

Claudio Nordio

illimity bank ( email )

Milano
Italy

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