An Operational Risk Capital Model Based on the Loss Distribution Approach

23 Pages Posted: 25 May 2018

Date Written: May 18, 2018

Abstract

In this paper, we construct a capital model for operational risk based on the observation that operational losses can, under a certain dimensional transformation, converge into a single, universal distribution, as previously established by Cohen in a 2016 paper. Derivation of the model is accomplished by directly applying the loss distribution approach to the transformed data, yielding a calibratable expression for risk capital. The expression, however, is applicable only to nonconduct losses because it incorporates empirical behaviors that are specific to them. For loss data that falls under the conduct category, this approach may not be valid; in such cases, one may have to resort to a different type of modeling technique.

Keywords: operational risk, capital model, standardized measurement approach (SMA), advanced measurement approach (AMA), loss distribution approach (LDA), method of dimensional analysis and similitude.

Suggested Citation

Cohen, Ruben, An Operational Risk Capital Model Based on the Loss Distribution Approach (May 18, 2018). Journal of Operational Risk, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3180683

Ruben Cohen (Contact Author)

Independent ( email )

No Address Available

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