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Title: Endogenous Hidden Markov Regimes in Operational Loss Data: Application to the Recent Financial Crisis
Authors: Dionne, Georges
Saissi Hassani, Samir
Keywords: Hidden Markov regime
Operational risk
2007-2009 Financial crisis
Skew t type 4 distribution
Bank's regulatory capital
Basel regulation
Issue Date: 2015-08
Series/Report no.: Cahiers du CIRPÉE;15-16
Abstract: We determine whether there is an endogenous Hidden Markov Regime (HMR) in the operational loss data of banks from 2001 to 2010. A high level regime is marked by very high loss values during the recent financial crisis. There is therefore temporal heterogeneity in the data. If this heterogeneity is not considered in risk management models, capital estimations will be biased. Levels of reserve capital will be overestimated in periods of normal losses, corresponding to the low level of the regime, and underestimated in periods of a high regime. Variation in capital can go up to 30% during this period of analysis when regimes are not considered.
URI: https://depot.erudit.org/id/004043dd
Appears in Collections:Cahiers de recherche du CIRPÉE

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