A Tale of Tails: An Empirical Analysis of Loss Distribution Models for Estimating Operational Risk Capital

93 Pages Posted: 26 Jul 2006

See all articles by Kabir Dutta

Kabir Dutta

CRA International; Johns Hopkins University - Carey Business School

Jason Perry

affiliation not provided to SSRN

Abstract

Operational risk is being recognized as an important risk component for financial institutions as evinced by the large sums of capital that are allocated to mitigate this risk. Therefore, risk measurement is of paramount concern for the purposes of capital allocation, hedging, and new product development for risk mitigation. We perform a comprehensive evaluation of commonly used methods and introduce new techniques to measure this risk with respect to various criteria. We find that our newly introduced techniques perform consistently better than the other models we tested.

Keywords: exploratory data analysis, operational risk, g-and-h distribution, goodness-of-fit, skewness-kurtosis, risk measurement, extreme value theory, peak-over-threshold method, generalized Pareto distribution, truncated lognormal distribution, loglogistic distribution

JEL Classification: G10, G20, G21, D81

Suggested Citation

Dutta, Kabir and Perry, Jason, A Tale of Tails: An Empirical Analysis of Loss Distribution Models for Estimating Operational Risk Capital. FRB of Boston Working Paper No. 06-13. Available at SSRN: https://ssrn.com/abstract=918880 or http://dx.doi.org/10.2139/ssrn.918880

Kabir Dutta (Contact Author)

CRA International ( email )

200 Clarendon Street, T-33
Boston, MA 02116
United States

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Jason Perry

affiliation not provided to SSRN

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