Time horizon scaling for operational risk VAR

Alan Steif

Journal of Operational Risk

Abstract: ABSTRACT The Basel II Accord has generated an urgency in the risk management community to model operational risk value-at-risk (VAR). The predominant methodology for computing operational risk VAR is the loss distribution approach. This paper discusses the scaling behavior of VAR as a function of time horizon within the loss-distribution approach. In particular, it is shown that for sufficiently high frequency operational loss data VAR will scale linearly with time horizon. This fact allows the practitioner to optimize VAR computations.

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