Multivariate Models for Operational Risk: A Copula Approach Using Extreme Value Theory and Poisson Shock Models

Omar Rachedi, Dean Fantazzini

Research output: Book chapterChapterpeer-review

4 Citations (Scopus)

Abstract

The aggregation of event types (ETs) is a crucial step for operational risk management techniques. Basel II requires the computation of a 99.9% VaR for each ET, and their aggregation via a simple sum if the dependence among ETs is not specified. Such a procedure assumes perfect positive dependence and therefore involves the implementation of the most conservative aggregation model. We propose a methodology that uses extreme-value theory to model the loss severities, copulas to model their dependence, and a general Poisson shock model to capture the dependencies among ETs. We show that this approach allows the allocation of capital and hedge operational risk in a more efficient way than the standard approach.

Original languageEnglish
Title of host publicationOperational Risk toward Basel III
Subtitle of host publicationBest Practices and Issues in Modeling, Management, and Regulation
PublisherJohn Wiley and Sons
Pages197-218
Number of pages22
ISBN (Print)9780470390146
DOIs
Publication statusPublished - 29 Nov 2011
Externally publishedYes

Keywords

  • Aggregation model
  • Credit risk
  • Local density approximation
  • Operational risk
  • Risk management

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