Operational Risk: Loss Distribution Approach | FRM Part 1 (Book 4) | Valuation and Risk Models)

This video from FRM Part 1 curriculum explains how a loss distribution is derived from an appropriate loss frequency distribution and loss severity distribution using Monte Carlo simulations. This video is included in the FRM Part 1 preparation course (www.finRGB.com....

[@ranggadwijaka265]

If we use 3 year historical data, will it predict loss for the next 3 years?

[@Sean-ds3br]

Great explanation! Thank you sir!

[@finRGB]

Hello Sean. Glad you found the video useful.

[@rakeshjoshi1425]

Great explanation. Thanks a ton for sharing. Would request you to upload more videos on FRM part 1.

[@finRGB]

Thank you for the appreciation, Rakesh. If you browse over to the Playlists section, there are book-wise playlists containing more videos for FRM Part 1. Cheers.

[@hiteshyadav7514]

Well explained as always

[@Malik95464]

Would you consider the exponential distribution for loss severity as an appropriate choice for modelling operational risk via monte carlo? (given the fact, that the lognormal distribution would lead to extrem values, which are not realistic, due to few data points and high variability in the data)

[@finRGB]

The lognormal distribution is one of the most commonly cited choice for loss severity distribution (the other choices being Gamma / exponential, Pareto). Exponential is a suitable choice if one is looking for a distribution that is relatively light tailed.