Endogenous Hidden Markov Regimes in Operational Loss Data: Application to the Recent Financial Crisis
Georges Dionne () and
Amir Saissi Hassani
Cahiers de recherche from CIRPEE
We determine whether there is an endogenous Hidden Markov Regime (HMR) in the operational loss data of banks from 2001 to 2010. A high level regime is marked by very high loss values during the recent financial crisis. There is therefore temporal heterogeneity in the data. If this heterogeneity is not considered in risk management models, capital estimations will be biased. Levels of reserve capital will be overestimated in periods of normal losses, corresponding to the low level of the regime, and underestimated in periods of a high regime. Variation in capital can go up to 30% during this period of analysis when regimes are not considered.
Keywords: Hidden Markov regime; operational risk; 2007-2009 financial crisis; Skew t type 4 distribution; bank’s regulatory capital; Basel regulation (search for similar items in EconPapers)
JEL-codes: G21 G24 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1516
Access Statistics for this paper
More papers in Cahiers de recherche from CIRPEE Contact information at EDIRC.
Bibliographic data for series maintained by Manuel Paradis ().