Mitic, Peter;
(2017)
Conduct risk: Distribution models with very thin tails.
In: Loja, Maria Amélia and Barbosa, Joaquim Infante and Rodrigues, José Alberto, (eds.)
SYMCOMP 2017 - 3rd International Conference on Numerical and Symbolic Computation: Developments and Applications, Proceedings.
(pp. pp. 383-402).
ECCOMAS: Guimarães, Portugal.
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Abstract
Regulatory requirements dictate that financial institutions must calculate risk capital (funds that must be retained to cover future losses) at least annually. Procedures for doing this have been well-established for many years, but recent developments in the treatment of conduct risk (the risk of loss due to the relationship between a financial institution and its customers) have cast doubt on ‘standard’ procedures. Regulations require that operational risk losses should be aggregated by originating event. The effect is that a large number of small and medium-sized losses are aggregated into a small number of very large losses, such that a risk capital calculation produces a hugely inflated result. To solve this problem, a novel distribution based on a probability density with an exp(-x4/(2s2)) component is proposed, where s is a parameter to be estimated. Symbolic computation is used to derive the necessary analytical expressions with which to formulate the problem, and is followed by numeric calculations in R. Goodness-of-fit and parameter estimation are both determined by using a novel method developed specifically for use with probability distribution functions. The results compare favourably with an existing model that used a LogGamma Mixture density, for which it was necessary to limit the frequency and severity of the losses. No such limits were needed using the exp(-x4/2) density.
| Type: | Proceedings paper |
|---|---|
| Title: | Conduct risk: Distribution models with very thin tails |
| Event: | 3rd International Conference on Numerical and Symbolic Computation: Developments and Applications |
| ISBN-13: | 978‐989‐99410‐3‐8 |
| Open access status: | An open access version is available from UCL Discovery |
| Publisher version: | https://www.eccomas.org/wp-content/uploads/sites/1... |
| Language: | English |
| Additional information: | This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | Conduct risk, Mathematica, R, capital value, value-at-risk, VaR, regulation, fat-tailed, exp(-x4/2), goodness-of-fit, TNA |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Computer Science |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10163499 |
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