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Modeling the yearly Value-at-Risk for operational risk in Chinese commercial banks

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  • Lu, Zhaoyang

Abstract

In this paper, we explore the loss data collection exercise for operational risk in Chinese commercial banks from 1999 to first half of 2006. Firstly, the above data are bootstrapped to analyze the capital allocation for a medium-scaled commercial bank in China. Secondly, for every selected cell, we calibrate two truncated distributions to fit the loss severity, one for ‘normal’ losses and the other for the ‘extreme’ losses. Moreover, a more realistic dependence structure – multivariate t copula function is used to measure the relation among the selected cells. In the final, the simulation results suggest that substantial savings can be achieved through measuring the dependence by means of multivariate t copula function than by means of perfect positive dependence.

Suggested Citation

  • Lu, Zhaoyang, 2011. "Modeling the yearly Value-at-Risk for operational risk in Chinese commercial banks," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 82(4), pages 604-616.
    • Handle: RePEc:eee:matcom:v:82:y:2011:i:4:p:604-616
    DOI: 10.1016/j.matcom.2011.06.008
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    Cited by:

    1. Xiaoqian Zhu & Jianping Li & Dengsheng Wu, 2019. "Should the Advanced Measurement Approach for Operational Risk be Discarded? Evidence from the Chinese Banking Industry," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(01), pages 1-15, March.
    2. Chang Liu & Dongtao Lin & Yifeng Wang & Shuai Qi, 2023. "A new market risk management approach for commercial banks' fixed‐income securities trading accounts," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 225-235, January.
    3. Xu, Chi & Zheng, Chunling & Wang, Donghua & Ji, Jingru & Wang, Nuan, 2019. "Double correlation model for operational risk: Evidence from Chinese commercial banks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 516(C), pages 327-339.

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    More about this item

    Keywords

    Operational risk; Loss distribution approach; Multivariate t copula; Monte Carlo; Mixture distribution; Value-at-Risk;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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