Related papers: The Calculus of Expected Loss: Backtesting Paramet…
Many banks adopt the Loss Distribution Approach to quantify the operational risk capital charge under Basel II requirements. It is common practice to estimate the capital charge using the 0.999 quantile of the annual loss distribution,…
Credit capital requirements in Internal Rating Based approaches require the calibration of two key parameters: the probability of default and the loss-given-default. This letter considers the uncertainty about these two parameters and…
In the recent Basel Accords, the Expected Shortfall (ES) replaces the Value-at-Risk (VaR) as the standard risk measure for market risk in the banking sector, making it the most important risk measure in financial regulation. One of the most…
Conditional forecasts of risk measures play an important role in internal risk management of financial institutions as well as in regulatory capital calculations. In order to assess forecasting performance of a risk measurement procedure,…
After the release of the final accounting standards for impairment in July 2014 by the IASB, banks will face the next significant methodological challenge after Basel 2. In this paper, first methodological thoughts are presented, and ways…
To quantify the operational risk capital charge under the current regulatory framework for banking supervision, referred to as Basel II, many banks adopt the Loss Distribution Approach. There are many modeling issues that should be resolved…
A new procedure is presented for the objective comparison and evaluation of default definitions. This allows the lender to find a default threshold at which the financial loss of a loan portfolio is minimised, in accordance with Basel II.…
Expected Shortfall (ES) has been widely accepted as a risk measure that is conceptually superior to Value-at-Risk (VaR). At the same time, however, it has been criticised for issues relating to backtesting. In particular, ES has been found…
The Basel II internal ratings-based (IRB) approach to capital adequacy for credit risk plays an important role in protecting the Australian banking sector against insolvency. We outline the mathematical foundations of regulatory capital for…
There is empirical evidence that recovery rates tend to go down just when the number of defaults goes up in economic downturns. This has to be taken into account in estimation of the capital against credit risk required by Basel II to cover…
The banking systems that deal with risk management depend on underlying risk measures. Following the Basel II accord, there are two separate methods by which banks may determine their capital requirement. The Value at Risk measure plays an…
Backtesting risk measures is a central task in financial regulation. While standard backtests evaluate whether a forecasting model is statistically consistent with observed losses, regulatory practice often requires assessing the…
We introduce new forecast encompassing tests for the risk measure Expected Shortfall (ES). The ES currently receives much attention through its introduction into the Basel III Accords, which stipulate its use as the primary market risk…
The issue of model risk in default modeling has been known since inception of the Academic literature in the field. However, a rigorous treatment requires a description of all the possible models, and a measure of the distance between a…
Expected Shortfall (ES) is a coherent measure of tail risk that captures the average loss beyond a quantile threshold. Despite the growing literature on ES regression conditional on covariates, no existing work considers ES modeling in…
To quantify an operational risk capital charge under Basel II, many banks adopt a Loss Distribution Approach. Under this approach, quantification of the frequency and severity distributions of operational risk involves the bank's internal…
Measuring the contribution of a bank or an insurance company to overall systemic risk is a key concern, particularly in the aftermath of the 2007--2009 financial crisis and the 2020 downturn. In this paper, we derive worst-case and…
This paper attempts to provide a decision-theoretic foundation for the measurement of economic tail risk, which is not only closely related to utility theory but also relevant to statistical model uncertainty. The main result is that the…
In this article we consider the parameter risk in the context of internal modelling of the reserve risk under Solvency II. We discuss two opposed perspectives on parameter uncertainty and point out that standard methods of classical…
Our primary aim is to find an estimate of the expected shortfall in various situations: (1) Nonparametric situation, when the probability distribution of the incurred loss is unknown, only satisfying some general conditions. Then, following…