The Bayesian approach to capital allocation at operational risk : a combination of statistical data and expert opinion

Mohamed Habachi and Saâd Benbachir

Operational risk management remains a major concern for financial institutions. Indeed, institutions are bound to manage their own funds to hedge this risk. In this paper, we propose an approach to allocate one's own funds based on a combination of historical data and expert opinion using the loss distribution approach (LDA) and Bayesian logic. The results show that internal models are of great importance in the process of allocating one's own funds, and the use of the Delphi method for modelling expert opinion is very useful in ensuring the reliability of estimates.

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Year of publication:	2020
Authors:	Habachi, Mohamed ; Benbachir, Saâd
Subject:	Bayesian approach \| capital allocation \| Delphi method \| expert opinion \| Monte Carlo \| value at risk \| Bayes-Statistik \| Bayesian inference \| Theorie \| Theory \| Risikomaß \| Risk measure \| Operationelles Risiko \| Operational risk \| Risikomanagement \| Risk management \| Monte-Carlo-Simulation \| Monte Carlo simulation \| Experten \| Experts \| Bankrisiko \| Bank risk \| Prognoseverfahren \| Forecasting model \| Statistische Methodenlehre \| Statistical theory

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