Cluster model relies on op risk ‘storms’

Capital models should reflect loss grouping – research

Dark storm clouds and lightning broken by the sun shining down onto a calm sea
Lightning can strike twice: tail events are often linked

The rare but catastrophic operational risk tail events that dominate total losses – and capital calculations – do not occur at random, argue researchers at the University of Sousse in Tunisia. Zied Gara and Lotfi Belkacem, in a paper due to appear in the Journal of Operational Risk in 2018, argue that most loss-distribution approach (LDA) models, such as those using extreme value theory to model the tail of the loss distribution, rely on the implicit assumption that extreme events occur

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