Extreme Value Theory And Its Applications In Operational Risk Model

In recent years, with the frequent occurrence of the operational risk events in financial institutions, especially in banks, how to manage the operational risk attracts the attention of the banking industry, regulatory authorities and the academe. Compared with the theory and skills of credit and market risk management, research on operational risk management is less consummate and still in its initial stage. The "New Basel Capital Accord" in June 2004 brought operational risk into minimum capital adequacy requirements, which embodies the latest international banking supervision concepts and the latest results of operational risk management. As to China's banking industry, how to raise the level of operational risk management has been an increasingly important subject. The issue of "operational risk management guidelines for the commercial banks" by the China Banking Regulatory Commission in May 2007 promotes the operational risk management greatly.The Extreme Value Theory that was traditionally used to predict tsunamis, earthquakes, floods and other natural disasters is a branch of order statistics, but now it has been widely used in financial risk management. It focuses on the distribution of the tail and can solve the problem of how to predict and prevent financial risk events in the absence of objective samples more effectively. Therefore, more and more people come to realize the great potential of Extreme Value Theory in the management of extreme events, so they begin to try to apply it into operational risk models.Based on the above considerations, in my dissertation firstly I introduce the status in quo of operational risk models at home and abroad, as well as the need to strengthen the operational risk management, enumerate different operational risk models and their pro and con; Secondly, I explain the basic theory of Extreme distribution in detail.And use POT theory to model operational risk, during which I present the test methods of how to estimate parameters, how to choose threshold; Finally, this theory and models in my dissertation can be a proposal to China's commercial banks.