Modeling operational risk data reported above a time-varying threshold

Details Modeling operational risk data reported above a time-varying threshold Modeling operational risk data reported above a time-varying threshold

2009-04-27

arxiv.org/abs/0904.4075v2

The Journal of Operational Risk 4(2), pp. 19-42, 2009 www.journalofoperationalrisk.com

Economy

Quantitative Finance

Risk Management

Scientific paper

Typically, operational risk losses are reported above a threshold. Fitting data reported above a constant threshold is a well known and studied problem. However, in practice, the losses are scaled for business and other factors before the fitting and thus the threshold is varying across the scaled data sample. A reporting level may also change when a bank changes its reporting policy. We present both the maximum likelihood and Bayesian Markov chain Monte Carlo approaches to fitting the frequency and severity loss distributions using data in the case of a time varying threshold. Estimation of the annual loss distribution accounting for parameter uncertainty is also presented.

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