The Effect of the Choice of the Loss Severity Distribution and the Parameter Estimation Method on Operational Risk Measurement - Analysis Using Sample Data -

Financial Systems and Bank Examination Department
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Financial Systems and Bank Examination Department: Bank of Japan

No 2007-12-26, Bank of Japan Research Papers from Bank of Japan

Abstract: A number of financial institutions in Japan and overseas employ the loss distribution approach as an operational risk measurement technique. However, as yet, there is no standard practice. There are wide variations, especially in the specifications of the models used, the assumed loss severity distribution and the parameter estimation methods. In this paper we introduce a series of processes for the measurement of operational risk: estimation of the loss severity distribution: estimation of the loss distribution and assessment of the results. For that purpose, we present an example of operational risk quantification for a sample data set that has the characteristics summarized below.

Date: 2007-12-26
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