Estimation of operational risk capital charge under parameter uncertainty

Pavel V. Shevchenko

Journal of Operational Risk

Abstract: ABSTRACT Many banks adopt the loss distribution approach to quantify the operational risk capital charge under Basel II requirements. It is common practice to estimate the capital charge using the 0.999 quantile of the annual loss distribution, calculated using point estimators of the frequency and severity distribution parameters. The uncertainty of the parameter estimates is typically ignored. One of the unpleasant consequences for the banks accounting for parameter uncertainty is an increase in the capital requirement. This paper demonstrates how the parameter uncertainty can be taken into account using a Bayesian framework that also allows for incorporation of expert opinions and external data into the estimation procedure.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-operational-risk/2 ... arameter-uncertainty (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ3:2160873

Access Statistics for this article

More articles in Journal of Operational Risk from Journal of Operational Risk
Bibliographic data for series maintained by Thomas Paine ().