Modeling operational risk: Estimation and effects of dependencies

Abstract

Being still in its early stages, operational risk modeling has, so far, mainly been concentrated on the marginal distributions of frequencies and severities within the context of the Loss Distribution Approach (LDA). In this study, drawing on a fairly large real-world data set, we analyze the effects of competing strategies for dependence modeling. In particular, we estimate tail dependence both via copulas as well as nonparametrically, and analyze its effect on aggregate risk- capital estimates. © Springer-Verlag Berlin Heidelberg 2010.