Multivariate VaRs For Operational Risk Capital Computation : A Vine Structure Approach
The Basel Advanced Measurement Approach requires financial institutions to compute capital requirements on internal data sets. In this paper the authors introduce a new methodology permitting capital requirements to be linked with operational risks. The data are arranged in a matrix of 56 cells. Constructing vine architecture, which is a bivariate decomposition of an n-dimensional structure (n > 2), they present a novel approach to compute multivariate operational risk VaRs. They discuss multivariate results regarding the impact of the dependence structure on the one hand, and of LDF modeling on the other. The method is simple to carry out, easy to interpret and complies with the new Basel Committee requirements.