Volume 3, Issue 1, May 2013, Pages 249–254
Fatima Zahra EL ARIF1
1 Department of Economics and Management, Research laboratory in Management, Financial systems and Risk management Hassan II University, Ain Chock Faculty, Casablanca, Morocco
Original language: English
Copyright © 2013 ISSR Journals. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
This paper aims to present the main lines of the Extreme Value Theory applied to the operational risk. The idea is to present a methodology which allows to identify a threshold by type of risk, and to feign the losses below the threshold with the classical laws, and the losses above with a Generalized Pareto Distribution (GPD).
The adequacy of the data to the law GPD allows to consider an extreme quantile, as minimal strategy, sensitive to the size of samples, and to plan random costs whose probability of occurrence is very low, but the choice of the threshold beyond of which the observation will be judged extreme, is a point to be handled with precaution, even if we propose a technique to quantify this threshold.
Furthermore, the costs of extreme losses do not lend themselves to modeling ; by definition this type of costs is rare, and the forecasts or the estimations must be often established with a big distrust, and outside the available data. The models must be used in a supple way, without believing completely to the limit.
The adoption of this method could allow the risk managers to observe the extreme events with a certain objectivity, to check the hierarchical organization of the classes of operational risks, and in the other hand, establish reserves to face these risks.
Author Keywords: Extreme Value Theory, Operational risk, Threshold, GPD, Extreme losses, Extreme events.
Fatima Zahra EL ARIF1
1 Department of Economics and Management, Research laboratory in Management, Financial systems and Risk management Hassan II University, Ain Chock Faculty, Casablanca, Morocco
Original language: English
Copyright © 2013 ISSR Journals. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Abstract
This paper aims to present the main lines of the Extreme Value Theory applied to the operational risk. The idea is to present a methodology which allows to identify a threshold by type of risk, and to feign the losses below the threshold with the classical laws, and the losses above with a Generalized Pareto Distribution (GPD).
The adequacy of the data to the law GPD allows to consider an extreme quantile, as minimal strategy, sensitive to the size of samples, and to plan random costs whose probability of occurrence is very low, but the choice of the threshold beyond of which the observation will be judged extreme, is a point to be handled with precaution, even if we propose a technique to quantify this threshold.
Furthermore, the costs of extreme losses do not lend themselves to modeling ; by definition this type of costs is rare, and the forecasts or the estimations must be often established with a big distrust, and outside the available data. The models must be used in a supple way, without believing completely to the limit.
The adoption of this method could allow the risk managers to observe the extreme events with a certain objectivity, to check the hierarchical organization of the classes of operational risks, and in the other hand, establish reserves to face these risks.
Author Keywords: Extreme Value Theory, Operational risk, Threshold, GPD, Extreme losses, Extreme events.
How to Cite this Article
Fatima Zahra EL ARIF, “Introduction to the Extreme Value theory applied to operational risk,” International Journal of Innovation and Applied Studies, vol. 3, no. 1, pp. 249–254, May 2013.
