Journal of Operational Risk

Calculation of aggregate loss distributions

Pavel V. Shevchenko


Estimation of the operational risk capital under the loss distribution approach requires evaluation of aggregate (compound) loss distributions, which is one of the classic problems in risk theory. Closed-form solutions are not available for the distributions typically used in operational risk; however, with modern computer processing power these distributions can be calculated virtually exactly using numerical methods. This paper reviews numerical algorithms that can be successfully used to calculate the aggregate loss distributions. In particular, Monte Carlo, Panjer recursion and Fourier transformation methods are presented and compared. In addition, several closed-form approximations based on moment matching and asymptotic results for heavy-tailed distributions are reviewed.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here