An efficient threshold choice for operational risk capital computation

Dominique Guegan (), Bertrand Hassani () and Cédric Naud ()
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Dominique Guegan: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Bertrand Hassani: BPCE - BPCE, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Cédric Naud: AON - AON

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: Operational risk quantification requires dealing with data sets which often present extreme values which have a tremendous impact on capital computations (VaR). In order to take into account these effects we use extreme value distributions to model the tail of the loss distribution function. We focus on the Generalized Pareto Distribution (GPD) and use an extension of the Peak-over-threshold method to estimate the threshold above which the GPD is fitted. This one will be approximated using a Bootstrap method and the EM algorithm is used to estimate the parameters of the distribution fitted below the threshold. We show the impact of the estimation procedure on the computation of the capital requirement - through the VaR - considering other estimation methods used in extreme value theory. Our work points also the importance of the building's choice of the information set by the regulators to compute the capital requirement and we exhibit some incoherence with the actual rules. Particularly, we highlight a problem arising from the granularity which has recently been mentioned by the Basel Committee for Banking Supervision.

Keywords: Operational risk; generalized pareto distribution; Picklands estimate; Hill estimate; Expectation Maximization algorithm; Monte Carlo simulations; VaR; Risques opérationnels; distribution de Pareto généralisée; estimateur de Pickland; estimateur de Hill; algorithme EM; méthodes de Monte Carlo (search for similar items in EconPapers)
Date: 2010-11
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00544342v2
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Published in 2010

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Related works:
Working Paper: An efficient threshold choice for operational risk capital computation (2011)
Working Paper: An efficient threshold choice for operational risk capital computation (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:halshs-00544342

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