medium · Frm Part 2 Operational Risk
A bank's internal loss data for operational risk shows a 'one big loss' principle consistent with subexponential distributions.
Which parameter change would have the most significant impact on the 99.9% annual quantile (capital) in a Loss Distribution Approach (LDA) model?
- Doubling the expected frequency (Poisson λ) of annual events.
- Increasing the tail thickness (shape parameter ξ) of the severity distribution.
- Decreasing the median loss value while keeping the variance constant.
- Reducing the correlation between different business-line loss frequencies.
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