The Correlation Problem in Operational Risk

Antoine Frachot, Thierry Roncalli and Eric Salomon

MPRA Paper from University Library of Munich, Germany

Abstract: This paper demonstrates that aggregate losses are necessarily low as long as we remain under the standard assumptions of LDA models. Moreover empirical findings show that the correlation between two aggregate losses is typically below 5%, which opens a wide scope for large diversification effects, much larger than those the Basel Committee seems to have in mind. In other words, summing up capital charges is in substantial contradiction with the type of correlation consistent with the standard LDA model.

Keywords: operational risk; LDA model; severity correlation; frequency correlation; aggregate loss correlation (search for similar items in EconPapers)
JEL-codes: C01 (search for similar items in EconPapers)
Date: 2004-01-23
References: View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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