An Assessment of Operational Loss Data and Its Implications for Risk Capital Modeling

26 Pages Posted: 15 Sep 2016

Date Written: September 12, 2016

Abstract

A mathematical method based on a special dimensional transformation is employed to assess operational loss data from a new perspective. The procedure, which is formally known as the Buckingham (Pi) Theorem, is used broadly in the field of experimental engineering to extrapolate the results of tests conducted on models to prototypes. When applied to the operational loss data considered in this paper, the approach leads to a seemingly universal trend underlying the resulting distributions regardless of how the data set is divided (e.g., by event type, business line, revenue band). This dominating trend, which appears to also acquire a tail parameter of 1, could have profound implications for how operational risk capital is computed.

Keywords: operational risk capital, dimensional analysis, scale invariant, tail parameter, standardized measurement approach, advanced measurement approach

Suggested Citation

Cohen, Ruben, An Assessment of Operational Loss Data and Its Implications for Risk Capital Modeling (September 12, 2016). Journal of Operational Risk, Vol. 11, No. 3, 2016. Available at SSRN: https://ssrn.com/abstract=2838671

Ruben Cohen (Contact Author)

Independent ( email )

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