Modeling Operational Loss Distributions
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A major risk faced by financial entities is operational risk. In general terms, operational risk is the risk of loss resulting from inadequate or failed internal processes, people, or systems or from external events. The two principal approaches in modeling operational loss distributions are the nonparametric approach and the parametric approach. It is important to employ a model that captures tail events and for this reason in operational risk modeling, distributions that are characterized as light-tailed distributions should be used with caution.
Keywords:
operational losses;
operational risk;
Nonparametric approach;
Parametric approach;
heavy-tailed distribution;
light-tailed distribution;
Technical report;
Federal Reserve Bank of Boston;
Technical report;
Bank of Italy
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