Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/25549 
Year of Publication: 
2008
Series/Report no.: 
CFS Working Paper No. 2008/14
Publisher: 
Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M.
Abstract: 
We show that the use of correlations for modeling dependencies may lead to counterintuitive behavior of risk measures, such as Value-at-Risk (VaR) and Expected Short- fall (ES), when the risk of very rare events is assessed via Monte-Carlo techniques. The phenomenon is demonstrated for mixture models adapted from credit risk analysis as well as for common Poisson-shock models used in reliability theory. An obvious implication of this finding pertains to the analysis of operational risk. The alleged incentive suggested by the New Basel Capital Accord (Basel II), amely decreasing minimum capital requirements by allowing for less than perfect correlation, may not necessarily be attainable.
Subjects: 
Operational Risk
Latent Variables
Correlated Events
JEL: 
C52
G11
G32
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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