Infinite-mean Models and the LDA for Operational Risk
by Johanna Nešlehová of RiskLab, ETH Zurich,
Abstract: Due to published statistical analyses of operational risk data, methodological approaches to the "advanced measurement approach" modeling of operational risk can be discussed in more detail. In this paper we raise some issues concerning correlation (or diversification) effects, the use of extreme value theory and the overall quantitative risk management consequences of extremely heavy-tailed data. We especially highlight issues around infinite-mean models. In addition to methodological examples and simulation studies, the paper contains indications for further research.
Keywords: AMA, coherence, diversification, extremes, infinite mean models, LDA, operational risk, Pareto, subadditivity.
Published in: Journal of Operational Risk, Vol. 1, No. 1, (Spring 2006), pp. 3-25.