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The Effect of the Choice of the Loss Severity Distribution and the Parameter Estimation Method on Operational Risk Measurement - Analysis Using Sample Data -

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  • Financial Systems and Bank Examination Department

    (Bank of Japan)

Abstract
A number of financial institutions in Japan and overseas employ the loss distribution approach as an operational risk measurement technique. However, as yet, there is no standard practice. There are wide variations, especially in the specifications of the models used, the assumed loss severity distribution and the parameter estimation methods. In this paper we introduce a series of processes for the measurement of operational risk: estimation of the loss severity distribution: estimation of the loss distribution and assessment of the results. For that purpose, we present an example of operational risk quantification for a sample data set that has the characteristics summarized below.

Suggested Citation

  • Financial Systems and Bank Examination Department, 2007. "The Effect of the Choice of the Loss Severity Distribution and the Parameter Estimation Method on Operational Risk Measurement - Analysis Using Sample Data -," Bank of Japan Research Papers 2007-12-26, Bank of Japan.
    • Handle: RePEc:boj:bojron:07-e-1226
    as

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    File URL: http://www.boj.or.jp/en/research/brp/ron_2007/data/ron0712c.pdf
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    References listed on IDEAS

    as
    1. de Fontnouvelle, Patrick & Dejesus-Rueff, Virginia & Jordan, John S. & Rosengren, Eric S., 2006. "Capital and Risk: New Evidence on Implications of Large Operational Losses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1819-1846, October.
    2. Ariane Chapelle & Yves Crama & Georges Hubner & Jean-Philippe Peeters, 2004. "Basel II and Operational Risk: Implications for risk measurement and management in the financial sector," Working Paper Research 51, National Bank of Belgium.
    3. Kabir Dutta & Jason Perry, 2006. "A tale of tails: an empirical analysis of loss distribution models for estimating operational risk capital," Working Papers 06-13, Federal Reserve Bank of Boston.
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