Tail dependency in op risk models

Practitioner's Corner Modelling

This article is concerned with dependency modelling issues arising from the loss distribution approach (LDA). It contrasts two different approaches for modelling tail dependencies in operational risk: the parametric dependency structure approach, which attempts to incorporate dependencies into the LDA based solely on a mathematical formula, and the stand-alone capital calculation approach, which implicitly takes into account the dependency between loss events in different business lines, risk