An efficient threshold choice for operational risk capital computation

Dominique Guegan (), Bertrand Hassani () and Cédric Naud ()
Additional contact information
Dominique Guegan: Centre d'Economie de la Sorbonne - Paris School of Economics, https://cv.archives-ouvertes.fr/dominique-guegan
Bertrand Hassani: BPCE and Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.cnrs.fr
Cédric Naud: BPCE

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: Operational risk quantification requires dealing with data sets which often present extreme values which have a tremendous impact on capital computations (VaR). In order to take into account these effects we use extreme value distributions to model the tail of the loss distribution function. We focus on the Generalized Pareto Distribution (GPD) and use an extension of the Peak-over-threshold method to estimate the threshold above which the GPD is fitted. This one will be approximated using a Bootstrap method and the EM algorithm is used to estimate the parameters of the distribution fitted below the threshold. We show the impact of the estimation procedure on the computation of the capital requirement - through the VaR - considering other estimation methods used in extreme value theory. Our work points also the importance of the building's choice of the information set by the regulators to compute the capital requirement and we exhibit some incoherence with the actual rules. Particularly, we highlight a problem arising from the granularity which has recently been mentioned by the Basel Committee for Banking Supervision

Keywords: Operational risk; generalized Pareto distribution; Picklands estimate; Hill estimate; expectation maximization algorithm; Monte Carlo simulations; VaR (search for similar items in EconPapers)
JEL-codes: C1 C6 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2010-11, Revised 2011-11
New Economics Papers: this item is included in nep-ban, nep-cmp and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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http://mse.univ-paris1.fr/pub/mse/CES2010/10096.pdf (application/pdf)

Related works:
Working Paper: An efficient threshold choice for operational risk capital computation (2011)
Working Paper: An efficient threshold choice for operational risk capital computation (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:10096

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