Journal of Operational Risk
ISSN:
1744-6740 (print)
1755-2710 (online)
Editor-in-chief: Marcelo Cruz

Quantification of operational risk: statistical insights on coherent risk measures
Dany Ng Cheong Vee, Preethee Gonpot and T. V. Ramanathan
Need to know
- The paper discusses a new coherent risk measure, the Modified Expected Shortfall and its application for Operational Risk quantification.
- In the context of the Advanced Measurement Approach, using VaR as the risk measure tends to overestimate operational losses.
- Overestimation of operational leads to excessive capital charges.
- The new coherent measure proposed leads to apparently less conservative operational loss figures which should in the context of application reduce capital charges.
Abstract
Operational risk is becoming a major part of corporate governance in companies, especially in the financial services industry. In this paper, we review some of the existing methods used to quantify operational risks in the banking and insurance industries. These methods use recent statistical concepts such as extreme value theory and copula modeling. We explore the possibility of using a coherent risk mea- sure – expected shortfall (ES) – to quantify operational risk. The suitability of the suggested risk measures has been investigated with the help of simulated data sets for two business lines. The generalized Pareto distribution is used for modeling the tails, and three distributions – lognormal, Weibull and Gamma – are used for the body data. Our results show that ES under all three distributions tends to be significantly larger than value-at-risk, which may lead to overestimating the operational loss and consequently overestimating the capital charge. However, the modified ES seems to provide a better way of mitigating any overestimation.
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Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
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