Modelling Operational Risk Losses with Graphical Models and Copula Functions

Danae Politou and Paolo Giudici
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Danae Politou: Citi

Methodology and Computing in Applied Probability, 2009, vol. 11, issue 1, 65-93

Abstract: Abstract The management of Operational Risk has been a difficult task due to the lack of data and the high number of variables. In this project, we treat operational risks as multivariate variables. In order to model them, copula functions are employed, which are a widely used tool in finance and engineering for building flexible joint distributions. The purpose of this research is to propose a new methodology for modelling Operational Risks and estimating the required capital. It combines the use of graphical models and the use of copula functions along with hyper-Markov law. Historical loss data of an Italian bank is used, in order to explore the methodology’s behaviour and its potential benefits.

Keywords: Operational risk; Copula functions; Bayesian networks; VaR; Basel II; AMA; 62-09; 90C40; 91B28; 91B30 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11009-008-9083-5

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