Calculation of aggregate loss distributions

Pavel V. Shevchenko

Papers from arXiv.org

Abstract: Estimation of the operational risk capital under the Loss Distribution Approach requires evaluation of aggregate (compound) loss distributions which is one of the classic problems in risk theory. Closed-form solutions are not available for the distributions typically used in operational risk. However with modern computer processing power, these distributions can be calculated virtually exactly using numerical methods. This paper reviews numerical algorithms that can be successfully used to calculate the aggregate loss distributions. In particular Monte Carlo, Panjer recursion and Fourier transformation methods are presented and compared. Also, several closed-form approximations based on moment matching and asymptotic result for heavy-tailed distributions are reviewed.

Date: 2010-08
New Economics Papers: this item is included in nep-ban, nep-cmp and nep-rmg
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Published in The Journal of Operational Risk 5(2), pp. 3-40, 2010

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1008.1108

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