Reasonableness and Correctness for Operational Value-at-Risk

Peter Mitic
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Peter Mitic: Department of Computer Science, University College London, London, UK

Economic Analysis Letters, 2023, vol. 2, issue 3, 35-44

Abstract: Calculating the amount of regulatory capital to cover unexpected losses due to operational events in the upcoming year has caused problems because of difficulties in fitting probability distributions to data. It is consequently difficult to judge an appropriate level of capital that reflects the risk profile of a financial institution. We provide theoretical and empirical analyses to link the calculated capital to the sum of losses using appropriate statistical approximations. We conclude that, in order to reasonably reflect the associated risk, the capital should be approximately half the sum of losses, with a wide bound for the ratio of capital to sum.

Keywords: Value at Risk; Central Limit Theorem; Loss Distribution; Loss Sum; Operational Risk; Regulatory Capital (search for similar items in EconPapers)
Date: 2023
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