A Markov-switching Generalized additive model for compound Poisson processes, with applications to operational losses models

Hambuckers, julien; Kneib, Thomas; Langrock, Roland; Silbersdorff, Alexander

doi:10.1080/14697688.2017.1417625

Article (Scientific journals)

A Markov-switching Generalized additive model for compound Poisson processes, with applications to operational losses models

Hambuckers, julien; Kneib, Thomas; Langrock, Roland et al.

2018 • In Quantitative Finance, 18 (10), p. 1679-1698

Peer Reviewed verified by ORBi

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https://hdl.handle.net/2268/216968

DOI
10.1080/14697688.2017.1417625

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Keywords :

GAMLSS; Hidden Markov model; operational losses; generalized Pareto distribution; compound Poisson process; distributional regression

Abstract :

[en] This paper is concerned with modeling the behavior of random sums over time. Such models are particularly useful to describe the dynamics of operational losses, and to correctly estimate tail-related risk indicators. However, time-varying dependence structures make it a difficult task. To tackle these issues, we formulate a new Markov-switching generalized additive compound process combining Poisson and generalized Pareto distributions. This flexible model takes into account two important features: on the one hand, we allow all parameters of the compound loss distribution to depend on economic covariates in a flexible way. On the other hand, we allow this dependence to vary over time, via a hidden state process. A simulation study indicates that, even in the case of a short time series, this model is easily and well estimated with a standard maximum likelihood procedure. Relying on this approach, we analyze a novel dataset of 819 losses resulting from frauds at the Italian bank UniCredit. We show that our model improves the estimation of the total loss distribution over time, compared to standard alternatives. In particular, this model provides estimations of the 99.9% quantile that are never exceeded by the historical total losses, a feature particularly desirable for banking regulators.

Research Center/Unit :

Chair of Statistics and Econometrics, Faculty of Economics

Disciplines :

Quantitative methods in economics & management

Author, co-author :

Hambuckers, julien ; Université de Liège - ULiège > HEC Liège : UER > Statistique appliquée à la gestion et à l'économie

Kneib, Thomas

Langrock, Roland

Silbersdorff, Alexander

Language :

English

Title :

A Markov-switching Generalized additive model for compound Poisson processes, with applications to operational losses models

Publication date :

2018

Journal title :

Quantitative Finance

ISSN :

1469-7688

eISSN :

1469-7696

Publisher :

Routledge

Volume :

Issue :

Pages :

1679-1698

Peer reviewed :

Peer Reviewed verified by ORBi

Name of the research project :

RTG 1644 Scaling problem in Statistics

Funders :

DFG - Deutsche Forschungsgemeinschaft

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since 14 December 2017

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