Selecting severity models


Statistical distribution modelling in operational risk has made significant progress in the past 10 years. As is widely known, for firms using the loss distribution approach (LDA) the operational value-at-risk is calculated using a combination of frequency and severity. Frequency is usually modelled by the Poisson distribution, with many firms also using the negative binomial as an alternative. Thus, selecting a frequency distribution is hardly an issue for most firms. That is not to say that

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