Journal of Operational Risk

Risk.net

An assessment of operational loss data and its implications for risk capital modeling

Ruben D. Cohen

  • Assessment of operational loss data through the method of dimensional analysis
  • Applied to both industry and internal data
  • A common trend with tail parameter of 1 is found to apply to all cuts of data, except internal CPBP
  • Granular details show no idiosyncratic features and appear only as noise

ABSTRACT

A mathematical method based on a special dimensional transformation is employed to assess operational loss data from a new perspective. The procedure, which is formally known as the Buckingham (Pi) Theorem, is used broadly in the field of experimental engineering to extrapolate the results of tests conducted on models to prototypes. When applied to the operational loss data considered in this paper, the approach leads to a seemingly universal trend underlying the resulting distributions regardless of how the data set is divided (eg, by event type, business line, revenue band). This dominating trend, which appears to also acquire a tail parameter of 1, could have profound implications for how operational risk capital is computed.

 

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