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(Non-)robustness of maximum likelihood estimators for operational risk severity distributions

By Sonja Huber

Abstract

The quality of operational risk data sets suffers from missing or contaminated data points. This may lead to implausible characteristics of the estimates. Outliers, especially, can make a modeler's task difficult and can result in arbitrarily large capital charges. Robust statistics provides ways to deal with these problems as well as measures for the reliability of estimators. We show that using maximum likelihood estimation can be misleading and unreliable assuming typical operational risk severity distributions. The robustness of the estimators for the Generalized Pareto distribution, and the Weibull and Lognormal distributions is measured considering both global and local reliability, which are represented by the breakdown point and the influence function of the estimate.Value at risk, Statistical methods, Downside risk, Extreme value statistical applications, Non-Gaussian distributions, Risk management, Risk measures,

DOI identifier: 10.1080/14697680903159240
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