A change of scene

Scenario analysis is often used to plug the gaps that conventional data can't fill when dealing with the tail of loss distributions. But it might have more to offer. Duncan Wood investigates

Scenario analysis used to be a divisive issue. Advanced measurement approach (AMA) applicants under the Basel II accord fell more or less neatly into one of two camps: those using loss data to model operational risk, and those using scenarios. Each camp championed its own approach and cast brickbats at the other: on the one hand, loss data was incomplete or irrelevant; on the other, scenarios were