Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/257888 
Year of Publication: 
2019
Citation: 
[Journal:] Risks [ISSN:] 2227-9091 [Volume:] 7 [Issue:] 2 [Article No.:] 50 [Publisher:] MDPI [Place:] Basel [Year:] 2019 [Pages:] 1-20
Publisher: 
MDPI, Basel
Abstract: 
We explore the Monte Carlo steps required to reduce the sampling error of the estimated 99.9% quantile within an acceptable threshold. Our research is of primary interest to practitioners working in the area of operational risk measurement, where the annual loss distribution cannot be analytically determined in advance. Usually, the frequency and the severity distributions should be adequately combined and elaborated with Monte Carlo methods, in order to estimate the loss distributions and risk measures. Naturally, financial analysts and regulators are interested in mitigating sampling errors, as prescribed in EU Regulation 2018/959. In particular, the sampling error of the 99.9% quantile is of paramount importance, along the lines of EU Regulation 575/2013. The Monte Carlo error for the operational risk measure is here assessed on the basis of the binomial distribution. Our approach is then applied to realistic simulated data, yielding a comparable precision of the estimate with a much lower computational effort, when compared to bootstrap, Monte Carlo repetition, and two other methods based on numerical optimization.
Subjects: 
advanced measurement approach
confidence interval
Monte Carlo
operational risk
value-at-risk
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
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