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**Greater Accuracy, Precision, and Robustness
**

J.D. Opdyke 1

Head of Operational Risk Modeling,

Quantitative Methods Group, GE Capital

Forthcoming, Journal of Operational Risk, Issue 9, No. 4, December, 2014.

The largest US banks and Systemically Important Financial Institutions are required by regulatory mandate to

estimate the operational risk capital they must hold using an Advanced Measurement Approach (AMA) as

defined by the Basel II/III Accords. Most of these institutions use the Loss Distribution Approach (LDA) which

defines the aggregate loss distribution as the convolution of a frequency distribution and a severity distribution

representing the number and magnitude of losses, respectively. Capital is a Value-at-Risk estimate of this

annual loss distribution (i.e. the quantile corresponding to the 99.9%tile, representing a one-in-a-thousand-year

loss, on average). In practice, the severity distribution drives the capital estimate, which is essentially a very

large quantile of the estimated severity distribution. Unfortunately, when using LDA with any of the widely

used severity distributions (i.e. heavy-tailed, skewed distributions), all unbiased estimators of severity

distribution parameters appear to generate biased capital estimates due to Jensen’s Inequality: VaR always

appears to be a convex function of these severities’ parameter estimates because the (severity) quantile being

estimated is so large and the severities are heavy-tailed. The resulting bias means that capital requirements

always will be overstated, and this inflation is sometimes enormous (sometimes even billions of dollars at the

unit-of-measure level). Herein I present an estimator of capital that essentially eliminates this upward bias

when used with any commonly used severity parameter estimator. The Reduced-bias Capital Estimator (RCE),

consequently, is more consistent with regulatory intent regarding the responsible implementation of the LDA

framework than other implementations that fail to mitigate, if not eliminate this bias. RCE also notably

increases the precision of the capital estimate and consistently increases its robustness to violations of the i.i.d.

data presumption (which are endemic to operational risk loss event data). So with greater capital accuracy,

precision, and robustness, RCE lowers capital requirements at both the unit-of-measure and enterprise levels,

increases capital stability from quarter to quarter, ceteris paribus, and does both while more accurately and

precisely reflecting regulatory intent. RCE is straightforward to explain, understand, and implement using any

major statistical software package.

Keywords: Operational Risk, Basel II, Jensen’s Inequality, AMA, LDA, Regulatory Capital, Economic

Capital, Severity Distribution

1

**J.D. Opdyke is Head of Operational Risk Modeling, Quantitative Methods Group at GE Capital where he is heading up all
**

operational risk modeling and quantification efforts including AMA capital estimation, CCAR, and all related modeling (e.g. ECap)

and reporting. J.D. has over 20 years of experience as a quantitative consultant, most of this in the banking and credit sectors where

his clients have included multiple Fortune and Global 50 banks and financial credit organizations. J.D.’s recent Journal of Operational

Risk paper (2012) was voted “Paper of the Year” by Operational Risk & Regulation staff in consultation with industry experts, and he

has been invited to present his work at the American Bankers Association Operational Risk Forum, the Operational Risk Exchange

Analytics Forum, and OpRisk North America 2014. J.D.’s other publications span statistical finance, computational statistics (solving

“Big Data” problems using SAS®), number theory/combinatorics, and applied econometrics. J.D. earned his undergraduate degree,

with honors, from Yale University, his Master’s degree from Harvard University where he was awarded both Kennedy and Social

Policy Research Fellowships, and he completed post-graduate statistics work as an ASP Fellow in the graduate mathematics

department at MIT.

The views expressed in this paper are the views of the sole author and are not necessarily those of GE Capital or any other institution.

The author may be contacted at J.D.Opdyke@GE.com.

The author extends his sincere appreciation to Toyo R. Johnson, Nicole Opdyke, and Ryan Opdyke for their thoughtful insights, and to

Kirill Mayorov for a thorough review and for spotting an error in an earlier draft.

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J.D. OPDYKE

**“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure
**

something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you

can’t improve it.” - H. J. Harrington

**Background, Introduction, and Objectives
**

In the United States, regulatory mandate is compelling the larger banks 2 and companies designated as

Systemically Important Financial Institutions (“SIFIs,” both bank and non-bank) 3 to use an Advanced

Measurement Approach (AMA) framework to estimate the operational risk capital they must hold in reserve. 4

Both industry practice and regulatory guidance have converged over the past decade 5 on the Loss Distribution

Approach (LDA) 6 as the most widely used AMA framework. Under this approach, data on operational risk loss

events 7 is used to estimate a frequency distribution, representing the number of loss events that could occur over

a given time period (typically a year), and to estimate a severity distribution, representing the magnitude of

those loss events. These two distributions are then combined via convolution to obtain an annual aggregate loss

distribution. Operational risk regulatory capital (RCap) is the dollar amount associated with the 99.9%tile of

this estimated loss distribution. Operational risk economic capital (ECap) is the quantile associated with,

typically, the 99.97%tile of the aggregate loss distribution, depending on the institution’s credit rating. 8

The frequency, severity, and capital estimations take place at the level of the Unit-of-Measure (UoM). UoM’s

simply are the groups into which operational risk loss events are categorized, generally under the competing

2

These include banks and systemically important financial institutions (“SIFIs”) with over $250 billion in total consolidated assets, or

over $10 billion in total on-balance sheet foreign exposure (and includes the depository institution subsidiaries of these firms). See

Federal Register (2007).

3

On July 8, 2013, the Financial Stability Oversight Council of the U.S. Department of the Treasury, as authorized by Section 113 of

the Dodd-Frank Act, voted to designate American International Group (AIG) and General Electric Capital Corporation, Inc. (GECC)

as SIFIs. On September 19, 2013, the Council voted to designate Prudential Financial, Inc. a SIFI. See

www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx

4

See BCBS (2004). The other two, less empirically sophisticated methods – the Basic Indicator Approach and the Standardized

Approach – are simple functions of gross income. As such, they are not risk sensitive and do not accurately reflect the complex risk

profiles of these financial institutions.

5

There have been no dramatic changes with respect to operational risk capital estimation under an AMA since the first comprehensive

guidance was published in 2004 (see BCBS, 2004).

6

This approach has a longer history of use within the insurance industry.

7

An operational risk loss event only can result from an operational risk, which is defined by Basel II as, “the risk of loss resulting

from inadequate or failed internal processes, people, and systems or from external events. This includes legal risk, but excludes

strategic and reputational risk.” See BCBS (2004).

8

ECap is higher than RCap as it addresses the very solvency of the institution. The 99.97%tile is a typical value used for ECap

(almost all are 99.95%tile or above), based on a firm’s credit rating, since it reflects 100% minus the historical likelihood of an AA

rated firm defaulting in a one-year period. See Hull (2012).

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J.D. OPDYKE

objectives of homogeneity and (larger) sample size. Basel II identifies eight business lines and seven event

types that together comprise fifty-six UoM’s. Individual institutions either use some or all of these UoM’s as is,

define their UoM’s empirically, or use some combination of these two approaches. Capital estimated at the

UoM level then must be aggregated to a single estimate at the enterprise level, and under the conservative (and

unrealistic) assumption of perfect dependence, capital is simply summed across all UoM’s. In reality, however,

losses do not occur in perfect lockstep across UoM’s no matter how they are defined, and so this imperfect

dependence in the occurrence of loss events can be estimated and simulated, typically via copula models. 9 This

potentially can provide an enormous diversification benefit to the banks/SIFIs, 10 and along with LDA’s risksensitive nature generally, is the major ‘carrot’ that counterbalances the ‘stick’ that is the regulatory requirement

of an AMA implementation. These potential benefits also have been a major motivation for LDA’s adoption by

many institutions beyond the US. For a more extensive and detailed background on the LDA and its

widespread use for operational risk capital estimation, see Opdyke and Cavallo (2012a and 2012b). 11

As described above, capital under the LDA is based on the convolution of the severity and frequency

distributions. However, estimates of severity and frequency are exactly that: merely estimates based only on

samples of operational risk loss event data. Their values will change from sample to sample, quarter to quarter,

and because they are based directly on these varying estimates, the capital estimates, too, will vary from sample

to sample, quarter to quarter. So it is essential to understand how this distribution of capital estimates is shaped

if we are to attempt to make reliable inferences (about “true” capital numbers) based on it. Is it centered on

“true” capital values (if we test it using known inputs with simulated data), or is it systematically biased? If

biased, in what direction – upwards or downwards – and under what conditions is this bias material? Is the

capital distribution reasonably precise, or do capital estimates vary so dramatically as to be completely

unreliable and little better than a wild guess at what the true capital values really are? Is the distribution

9

There are other approaches to estimating dependence structures and tail dependence in particular, such as mixture models (see

Reshetar, 2008), but many are much newer and not yet tested extensively in practice (for example, see Arakelian and Karlis, 2014,

Bernard and Vanduffel, 2014, Dhaene et al., 2013, and Polanski et al., 2013).

10

See RMA (2011), OR&R (2009), and Haubenstock and Hardin (2003).

11

A key point here that drives a focus of this paper is the fact that empirically, the severity distribution drives capital much more than

does the frequency distribution – typically orders of magnitude more. This is true both from the perspective of the choice of which

severity distribution is used vs. the choice of which frequency distribution is used (the latter changes capital very little compared to the

former), as well as variance in the values of the severity parameters vs. variance in the values of the frequency parameter(s): a change

of a standard deviation of the former typically has an enormous effect on estimated capital in both absolute and relative terms, while

the same change in the latter has a much smaller, if not de minimis effect on estimated capital. This is well established in the literature

(see Opdyke and Cavallo, 2012a and 2012b, and Ames et al., 2014), and the analytic reasons for this are demonstrated later in this

paper. So while stochastic frequency parameter(s) always are and always should be included in operational risk capital estimation and

simulation, the severity distribution typically (and rightly) is more of a focus of research on operational risk capital estimation than is

the frequency distribution.

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reasonably robust to real-world violations of the properties of the loss data assumed by the estimation methods,

or do modest deviations from idealized, mathematically convenient textbook assumptions effectively distort the

results in material ways, and arguably render them useless? These are questions that only can be answered via

scrutiny of the entire distribution of capital estimates (say, at least one thousand estimates), as opposed to a few

capital numbers that may or may not appear to be “reasonable” based on a few estimates of severity and

frequency distribution parameters. And we should be ready for answers that may call into question the

conceptual soundness of the LDA framework, or at least the manner in which major components of it are

commonly implemented in this setting. 12

This paper addresses these issues directly by focusing on the capital distribution and what are arguably the three

biggest challenges to LDA-based operational risk capital estimation: the fact that even under idealized data

assumptions, 13 LDA-based capital estimates are i) systematically inflated (and sometimes grossly inflated by

many hundreds of millions of dollars under conditions not uncommon for the largest, and even medium-sized

banks), 14 ii) extremely imprecise by any reasonable measure (i.e. they are extremely variable from sample to

sample – see Opdyke, 2013, Opdyke and Cavallo, 2012a, Cope et al., 2009, and OR&R, 2014, for more on this

topic), and iii) extremely non-robust to violations of the (i.i.d.) data assumptions almost always made when

implementing the LDA (and which are universally recognized as unrealistic; see, for example, Opdyke and

Cavallo, 2012a, and Horbenko et al., 2011). Yet it is precisely these three factors – capital accuracy, capital

precision, and capital robustness – that arguably are the only criteria that matter when assessing the efficacy of

an operational risk (or any) capital estimation framework. Indeed, the stated requirement of the US Final Rule

on the Advanced Measurement Approaches for Operational Risk (see US Final Rule, 2007, and Interagency

Guidance, 2011) is for “credible, transparent, systematic, and verifiable processes that incorporate all four

operational risk elements … [that should be combined] in a manner that most effectively enables it [the

regulated bank/sifi] to quantify its exposure to operational risk.” But can it even be seriously argued that an

operational risk capital estimation framework that generates results consistent with i), ii), and iii) above could

12

One such example is the extremely large size of the quantile of the aggregate loss distribution – that corresponding to the 99.9%tile

– that firms are required to estimate. See Degen and Embrechts (2011) and Nešlehová et al. (2006) for more details.

13

The most sweeping, yet common assumption is that the loss data is “i.i.d.” – independent and identically distributed. “Independent”

means that the values of losses are unrelated across time periods, and “identically distributed” means that losses are generated from

the same data generating process, typically characterized as a parametric statistical distribution (see Opdyke and Cavallo, 2012a,

2012b). The assumption that operational risk loss event data is “i.i.d” is widely recognized as unrealistic and made more for

mathematical and statistical convenience than as a reflection of empirical reality (see Opdyke and Cavallo, 2012a, 2012b). The

consequences of some violations of this assumption are examined later in this paper.

14

This has been confirmed by empirical findings in the literature (see Opdyke and Cavallo, 2012a and 2012b, Opdyke, 2013, Joris,

2013, and Ergashev et al., 2014) as well as a recent position paper from AMAG (“AMA Group”), a professional association of major

financial institutions subject to AMA requirements (see RMA, 2013, which cites the need for “Techniques to remove or mitigate the

systematic overstatement (bias) of capital arising in the context of capital estimation with the LDA methodology”).

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J.D. OPDYKE

**be deemed “credible”? Or even “verifiable” in the face of excessive variability in capital estimate outcomes?
**

How could one even assess whether i), ii), and/or iii) are true without scrutinizing the distribution of capital

estimates that the framework generates under controlled conditions (i.e. under well-specified and extensive loss

data simulations)?

**Unfortunately, very little operational risk research tackles these three issues head-on through a systematic
**

examination of the entire distribution of capital estimates, as opposed to simply presenting several capital

estimates almost as an afterthought to an analysis that focuses primarily on severity parameter estimation (a few

exceptions include Rozenfeld, 2011, Opdyke and Cavallo, 2012a and 2012b, Opdyke, 2013, Joris, 2013, and

Zhou, 2013). However, cause for optimism lies in the fact that a single analytical source appears to account for

much, if not most of the deleterious effect of these three issues on capital estimation. What has become known

as Jensen’s inequality – a time-tested analytical result first proven in 1906 (see Jensen, 1906) – appears to be the

sole cause of i), as well as a major contributing factor to ii) and, to a lesser extent, iii). Yet this has been

overlooked and virtually unmentioned in the operational risk quantification and capital estimation literature (see

Opdyke and Cavallo, 2012a, b, Opdyke, 2013, and Joris, 2013 for the only known exceptions). 15 If a fraction of

the effort that has gone into research on severity parameter estimation also is directed at capital estimation, and

specifically on defining, confronting, and mitigating the biasing, imprecision, and non-robustness effects

apparently caused by Jensen’s inequality, then all in this space – practitioners, academics, regulated (and even

non-regulated) financial institutions, and regulators – quickly will be much farther along the path toward

making the existing LDA framework much more useable and valuable in practice. 16 It has been a decade since

Basel II published comprehensive guidance on operational risk capital estimation, 17 and still these three issues

remain to dog the industry’s efforts at effectively utilizing the LDA framework to provide reasonably accurate,

reasonably precise, and reasonably robust capital estimates. So we are long past due for a refocusing of our

analytical lenses specifically on the capital distribution and on these three challenges to make some real strides

15

Of course, Jensen’s inequality has long been the subject of applied research in other areas of finance (see Fisher et al., 2009),

applied econometrics (see Duan, 1983), and even bias in market risk VaR (see, for example, Liu and Luger, 2006). But proposed

solutions to its deleterious effects on estimation have not been extended to operational risk capital, the literature for which has almost

completely ignored it (with the exception of Opdyke and Cavallo, 2012a and 2012b, Opdyke, 2013, and Joris, 2013). Although it does

not identify Jensen’s inequality as the source, RMA (2013) does identify “the systematic overstatement (bias) of capital arising in the

context of capital estimation with the LDA methodology,” and Ergashev et al. (2014) present extensive empirical results exactly

consistent with its effects and with the empirical results shown in this paper.

16

Here, “useable” and “valuable” are based on assessments of the accuracy, precision, and robustness of the capital estimates that the

framework generates. A realistic example, shown later in this paper, makes the point: when true capital is, say, $391m, but 1,000

LDA capital estimates (based on 1,000 i.i.d. simulated samples) average $640m with a standard deviation of over $834m, the

framework generating the estimates, due to this large upward bias and gross imprecision, unarguably is not terribly useful or valuable

to those needing to make business decisions based on its results. And this is under the most idealized i.i.d. data assumptions which are

rarely, if ever, realized in actual practice.

17

See BCBS (2004).

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J.D. OPDYKE

**towards providing measurable, implementable, and impactful solutions to them. The direct financial and risk
**

mitigation stakes for getting these capital numbers “right” (according to these three criteria) are enormously

high for individual financial institutions (especially the larger ones), as well as for the industry as a whole, so

our best efforts as empirical researchers should require no less than this refocusing, if not complete problem

resolution.

To this end, this paper has two main objectives: first, to identify and clearly demonstrate that Jensen’s

inequality is the most like source of the materially deleterious effects on LDA-based operational risk capital

estimation, define the specific conditions under which these effects are material, and make the case for a shift in

focus to the distribution of capital estimates, rather than focusing solely on the distribution of the severity

parameter estimates. After all, capital estimation, not parameter estimation, is the endgame here. And

secondly, to develop and propose a capital estimator – the Reduced-bias capital estimator (RCE) – that tackles

all three of the major issues mentioned above – capital accuracy, capital precision, and capital robustness – and

unambiguously improves capital estimates by all three criteria when compared to the most widely used

implementations of LDA based on maximum likelihood estimation (MLE) (and a wide range of similar

estimators). Requirements governing the development and design of RCE include:

•

Its use and assumptions must not conflict with those supporting the LDA framework specifically, 18 and it

must be entirely consistent with regulatory intent regarding this framework’s responsible and prudent

implementation generally (I argue below that RCE is more consistent with regulatory intent in the context of

applying the LDA than most, if not all other known implementations of it). 19

•

**It must utilize the same general methodological approach across sometimes very different severity
**

distributions, including those that are truncated to account for data collection thresholds.

•

It must “work” regardless of whether the mean of the severity distribution is infinite, or close to infinite.

•

Its range of application must encompass most, if not all, of the commonly used estimators of the severity

(and frequency) distributions.

•

It must “work” regardless of the method used to approximate the VaR of the aggregate loss distribution.

18

This is not to say that research that proposes changing the bounds or parameters of the framework is any less valuable per se, but

rather, that this was a conscious choice made to maximize the range of application of the proposed solution (RCE). RCE is designed

to be entirely consistent with the LDA framework specifically, and regulatory guidance and expectation generally so that an

institution’s policy decision to strictly adhere to all aspects of the framework would not preclude usage of RCE. In fact, RCE is

arguably more consistent with regulatory guidance and expectation than are most, if not all other implementations of LDA, because its

capital estimates are not systemically biased upwards: they are, on average, quite literally the expected values for capital, or very

close, under the LDA framework (in other words, they are centered on true capital). So capital estimates based on RCE arguably are

most consistent with regulatory intent regarding the responsible implementation of the LDA framework, as discussed below.

19

It is important to note that regulatory guidance has avoided prescribing of any one AMA framework, including the LDA, even

though the LDA has become the de facto choice among AMA institutions, including those that have recently exited parallel run.

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J.D. OPDYKE

•

It must be easily understood and implemented using any widely available statistical software package.

•

It must implementable using only a reasonably powerful desktop or laptop computer.

•

**It must provide unambiguous improvements over the most widely used implementations of LDA on all
**

three of the key criteria for assessing the efficacy of an operational risk capital estimation framework:

capital accuracy, capital precision, and capital robustness

The remainder of the paper is organized as follows. First, I define and discuss Jensen’s inequality and its

apparent effects on operational risk capital estimation under LDA, demonstrate the conditions under which

these effects are material, and define the extremely wide range of (severity parameter) estimators for which

these results are relevant. Next I develop and present the Reduced-bias Capital Estimator (RCE), discuss the

details of its implementation, and present some new analytic derivations that assist in this implementation (as

well as with the implementation of LDA generally). Thirdly, I conduct an extensive simulation study

comparing RCE to the most widely used implementation of LDA as a benchmark (i.e. using maximum

likelihood estimation (MLE)). 20 The study covers a number of very distinct severity distributions, both

truncated and non-truncated, widely varying values for regulatory capital (RCap) and economic capital (ECap)

at the unit-of-measure level (from $38m to over $10.6b), and wide ranges of severity parameter values that

cover conditions of both finite and infinite severity mean (showing that RCE “works” even under the latter

condition). The study also includes i) a new analytic derivation for the mean of a very commonly used severity

distribution under truncation; ii) a very fast, efficient, and stable sampling (perturbation) method based on isodensities; iii) an improved single loss approximation for estimating capital under conditions that may include

infinite means; and iv) a new analytic approximation of the Fisher information a commonly used severity

distribution under truncation (thus avoiding computationally expensive numeric integration). I discuss

throughout how RCE is entirely consistent with the LDA framework specifically, and with regulatory intent and

expectation generally regarding its responsible (i.e. unbiased, or close) implementation. I conclude with a

summary and a discussion of areas for future research.

**Key Methodological Background
**

Before discussing Jensen’s inequality, I turn to a more recent result to provide some explanatory foundation for

the relevance of the former in operational risk capital estimation. As mentioned above, under LDA the

aggregate loss distribution is defined as the convolution of the frequency and severity distributions, and in

20

For severity distribution estimation, AMAG (2013), in its range of practice survey from 2012, states “MLE is predominant, by far.”

This also is true for other components of the framework (e.g. dependence modeling across UoMs).

It is important to note that the MLE-based capital distributions do not dramatically differ from those of most other (severity)

estimators in this setting, and so the sometimes enormous benefits of RCE over MLE also apply to most other implementations of

LDA.

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J.D. OPDYKE

almost all cases no closed-form solutions exist to estimate the VaR of this compound distribution. Böcker and

Klϋppelberg (2005) and Böcker and Sprittulla (2006) were the first to provide an analytical approximation of

this VaR in (1), and Degen (2010) refined this and expanded its application to include conditions of infinite

mean in (2a,b,c). 21

1−α

Cα ≈ F −1 1 −

λ

+ ( λ − 1) µ

(1)

if ξ < 1,

1−α

Cα ≈ F −1 1 −

λ

+ λµ

if ξ = 1,

1−α

Cα ≈ F −1 1 −

λ

−1 1 − α

+ cξ λµ F F 1 − λ

1−α

−1

if 1 < ξ < 2, Cα ≈ F 1 −

λ

(2.a)

1−α

−1

− (1 − α ) F 1 −

λ

cξ

⋅

1−1 ξ

( ξ ≥ 2 is so extreme as to not be relevant here) where, cξ =

x)

=

cξ 1=

for ξ 1 , µ F (=

(2.b)

(1 − ξ )

(2.c)

Γ 2 (1 − 1 ξ )

2Γ (1 − 2 ξ )

for 1<ξ < ∞ and

x

s ) ds ; C = "capital"; aa

"confidence

level" (e.g.

=

∫ 1 − F (=

a

0.999 for RCap);

0

F −1 (

**is the (typically Poisson) frequency parameter; = mean of severity;
**

) is the quantile function of the severity; lm

x = the tail index; and Γ ( ) is the gamma function.

I focus now on Degen’s (2.a) to make the point that the first term, the severity quantile, is much larger –

sometimes even orders of magnitude larger – than the second term (the “mean correction”), and so capital is

essentially a very large quantile of the severity distribution (and this is consistent with the widely cited finding

in the literature that severity, not frequency, is what really drives capital (see Opdyke and Cavallo, 2012a and

2012b)). But at least as important is the fact that the quantile of the severity distribution that must be estimated

is much larger than that corresponding to the 99.9%tile – it actually corresponds to the [1 – (1-α)/λ] = 0.99997 =

99.997%tile (assuming λ=30), which is nearly two orders of magnitude larger (the corresponding percentiles for

ECap are the 99.97%tile and 99.999%tile, respectively, assuming λ=30 and a good credit rating). So not only is

capital essentially a quantile of the severity distribution, but this quantile also is extremely large. The essence

of the problem, then, reduces to estimating an extremely large quantile of the severity distribution. 22 This fact,

combined with the fact that the only severities used (and allowed) in operational risk capital estimation are

21

Sahay et al. (2007) presented similar results a few years earlier.

22

However, as noted above, estimation and simulation of the frequency parameter is never ignored in this paper. The purpose of

making this point here is heuristic as it pertains to the explanation of the relevance of Jensen’s inequality in this setting.

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J.D. OPDYKE

medium- to heavy-tailed, is the reason that Jensen’s inequality apparently can so adversely and materially affect

capital estimation, as described below.

Jensen’s Inequality

Jensen’s Inequality Defined

In 1906, Johan Jensen proved that the (strictly) convex transformation of a mean is less than the mean after a

(strictly) convex transformation (and that the opposite is true for strictly concave transformations). When

applied to random variable β , this is shown in Figure 1 below as E[g( βˆ )] > g(E[ βˆ ]), with a magnitude of

FIGURE 1: Graph of Jensen’s Inequality with Strictly Convex Function (right-skewed, heavy-tailed cdf)

( )

Vˆ = g βˆ

( )

g βˆ = severity cdf

g ( CI HIGH )

( ( ))

g ( E ( βˆ ) )

E g βˆ

( ( ))

pdf g βˆ

J.I.

( )

pdf βˆ

g ( CI LOW )

(from Kennedy, 1992. p.37)

CI LOW

( )

E βˆ

CI HIGH

βˆ

**Jensen’s Inequality = J.I. = E[g( βˆ )] – g(E[ βˆ ]). 23 An intuitive interpretation of Figure 1 is that the strictly
**

convex function, g( ), “stretches out” the values of the random variable β above its median more than it does

below, thus positively skewing the distribution of Vˆ = g( βˆ ) and increasing its mean above what it would have

23

Figure 1 shows VaR for a given cumulative probability, p. As p increases beyond some large level (e.g. p > 0.999), so does VaR’s

convexity in this setting, as discussed later in the paper.

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J.D. OPDYKE

been had the function g( ) been a linear function. In other words, Vˆ also would have been symmetric like βˆ ,

with a mean equal to its median, but because g( ) is convex, its upper tail is “stretched out” making its mean

greater than its median. 24

**Jensen’s Inequality in Operational Risk Capital Estimation
**

The relevance of Jensen’s inequality to operational risk capital estimation appears to be the joint fact that the

only severities used (and permitted) in operational risk capital estimation are medium- to heavy-tailed, and the

severity quantile being estimated is so extremely large: under these conditions, VaR appears to always be a

convex function, like g( ), of the parameters of the severity distribution, which here is the vector β (we can

visualize β as a single parameter without loss of generality as the multivariate case for Jensen’s inequality is

well established (see Schaefer, 1976). Consequently, the capital estimation, Vˆ = g( βˆ ), will be biased upwards.

In other words, its expected value, E[g( βˆ )], will be larger than its true value, g(E[ βˆ ]). Stated differently, if we

generated 1,000 i.i.d. random samples of losses based on “true” severity parameter values = β , and for each of

the 1,000 estimated βˆ ’s we calculated capital Vˆ = g( βˆ ), the average of these 1,000 capital estimates ( Vˆ ’s)

will be larger than V =g( β ), which is “true” capital.

The above is straightforward, and the biasing effects of Jensen’s inequality are very well established and not in

doubt. The only question is whether VaR always is a strictly convex function of the estimators of the severity

parameters. All of the estimators used in this setting are at least symmetrically distributed, and most are

normally distributed, at least asymptotically. 25 So if VaR is a convex function of them, there is no doubt that

capital will be systematically biased upwards (in addition to being, on average, more skewed, and with larger

root mean squared error (RMSE) 26 and standard deviation, as shown empirically later in this paper). To check

for this convexity, we can do several things: examine VaR as a function of each parameter individually (i.e.

Importantly, note that the median of Vˆ actually is equal to the transformation of the original mean: g(E[ βˆ ]) = g( β ) . This is due

to the fact that g( ) is a monotone transformation (here, of a symmetric, unbiased variable). This is shown below and exploited to our

advantage later in this paper when designing a reduced-based capital estimator.

24

25

All M-class estimators are asymptotically normal, and these include many of the most commonly used estimators in this setting (e.g.

maximum likelihood estimation (MLE), many generalized method of moments (GMM) estimators, penalized maximum likelihood

(PML), optimally bias-robust estimator (OBRE), Cramér von-Mises (CvM) estimator, and PITS estimator, among many others). See

Hampel et al. (1986) and Huber and Ronchetti (2009) for more details.

26

The MSE is the average of the squared deviations of a random variable from its true value. This is also equal to the variance of the

2

2

1 n ˆ

=

Vi − V = Var Vˆ + Bias Vˆ . The RMSE is the square root of MSE. So RMSE

random variable plus its bias squared MSE

∑

n i =1

(

RMSE

of the capital distribution ==

(

1 n ˆ

∑ Vi − V

n i =1

)

)

( )

( )

2

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J.D. OPDYKE

**check for marginal convexity); examine and attempt to define the multidimensional surface of VaR as a
**

multivariate function of the severity parameters (i.e. check for multidimensional convexity (in three

dimensional space for two-parameter severities)); and examine the behavior of VaR itself under straightforward

i.i.d. Monte Carlo simulations to determine if it is consistent with the effects of Jensen’s inequality as a convex,

or at least “convex-dominant” function of the severity parameters. 27

The check for marginal convexity has been performed graphically in Appendix A Figure A1, for three widely

used severity distributions (7 others – the three-parameter Burr Type XII, the LogLogistic, and the truncated

versions of all five – are available from the author upon request). 28 All demonstrate that for sufficiently extreme

percentiles (e.g. p > 0.999), VaR is a convex function of either one or both of the severity parameters (and a

linear function of the others). These results are summarized in Table 1.

**One approach to checking for convexity (or convexity-dominance) in the multidimensional VaR surface is an
**

examination of the signs and relative magnitudes of the eigenvalues of the shape operator (see Jiao and Zha,

2008). This turns out to be analytically nontrivial, if not intractable under truncation, and even numeric

calculations for many of the relevant severities are nontrivial given the sizes of the severity percentiles (e.g. p =

0.99999) that must be used in this setting (because most of the gradients are exceedingly large for such high

percentiles). So this research currently remains underway, and without this mathematical verification,

attributions of capital inflation apparently due to Jensen’s inequality and VaR’s apparent convexity are based

solely on empirical results, and conservatively and explicitly deemed “preliminary” or “presumed” herein.

However, arguably the most directly relevant of these three “checks” is the behavior of the capital estimate

itself: if it consistently reflects what we would expect to see under Jensen’s inequality, i.e. systematically

inflated capital estimates under i.i.d. Monte Carlo simulations, then this, combined with consistent marginal

convexity, would provide reasonably strong, if preliminary evidence that VaR is a convex (or convex-dominant)

function of the entire vector of severity parameters. As such, severity parameter estimates that are subject to

sampling variability will generate capital estimates that are, on average, inflated, as shown in Figure 1. And this

27

“Convex-dominant” is used here to indicate cases where VaR is not a convex function of each parameter individually, but may be a

convex function of the entire vector of severity parameter estimates, given its variance-covariance matrix. For example, while VaR of

GPD is marginally convex in ξ, it is marginally linear in θ (see Appendix A). Also, some areas of its multidimensional surface appear

to indicate the existence of saddlepoints, i.e. surfaces with hyperbolic points. But if the convexity in one direction of such a surface is

orders of magnitude larger than the concavity in the other, as measured by the relative sizes of their principal curvatures (i.e. the

eigenvalues of its shape operator), then the net effect of sampling variation on VaR, under the estimator’s variance-covariance matrix,

would appear to be dominated by convexity rather than concavity.

28

This is easily confirmed analytically for those distributions that have closed form representations of their inverse CDFs (i.e. VaR

(

)

**= exp µ + σΦ −1 ( p ) ; ∂ 2VaR ∂µ 2 =VaR; ∂ 2VaR ∂σ 2 =VaR ⋅ Φ −1 ( p ) .
**

functions). For example, for the LogNormal, VaR

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2

J.D. OPDYKE

**is exactly what we observe: consistent marginal convexity, as shown in Appendix A, and consistent and strong
**

capital inflation, as shown in the extensive simulation study presented below. But the broader question here is

whether all severity distributions relevant to operational risk capital estimation can be so characterized.

**TABLE 1: Marginal VaR Behavior OVER RELEVANT DOMAIN (p > 0.999) by Severity
**

Severity

Relationship

Distribution

VaR is a Convex/Linear Function of…

Between

1) LogNormal (µ, σ)

2) LogLogistic (α, β)

3) LogGamma (a, b)

4) GPD (ξ, θ)

5) Burr (type XII) (ϒ, α, β)

6) Truncated 1)

7) Truncated 2)

8) Truncated 3)

9) Truncated 4)

10) Truncated 5)

Parameter 1

Convex

Linear

Convex

Convex

Convex

Convex

Linear

Convex

Convex

Convex

Parameters

Independent

Independent

Dependent

Dependent

Dependent

Dependent

Dependent

Dependent

Dependent

Dependent

Parameter 2

Convex

Convex

Convex

Linear

Convex

Convex

Convex

Convex

Linear

Convex

Parameter 3

Linear

Linear

**Before answering this question, it should be noted here that convexity sometimes replaces subadditivity (as well
**

as positive homogeneity; see Fölmer and Schied, 2002, and Frittelli and Gianin, 2002) as an axiom of coherent

risk measures (see Artzner et al., 1999), and is only slightly less strong an axiom compared to subadditivity. 29

And while it is very well established that VaR is not globally subadditive across all quantiles for all parametric

statistical distributions, for the specific group of medium- to heavy-tailed severities relevant to LDA-based

operational risk capital estimation, and very extreme percentiles of those severities (p > 0.999), it appears that

VaR may very well always be subadditive. Danielsson et al. (2005) proved that regularly-varying severities

with finite means all were subadditive for sufficiently high percentiles (e.g. p > 0.99; for similar results, see also

Embrechts and Neslehova, 2006, Ibragimov, 2008, and Hyung and de Vries, 2007). And the same result has

been shown empirically in a number of publications (see, for example, Degen et al., 2007). Although supraadditivity has been proven for some families of extremely heavy-tailed severities with infinite mean, (see

Embrechts and Nešlehová, 2006, Ibragimov, 2008, and Hyung and de Vries, 2007), and consequently strong

caution has been urged when using such models for operational risk capital estimation (see Nešlehová et al.,

2006), this does not cover all such severities. In fact, high VaR (p > 0.999) of the Generalized Pareto

Distribution (GPD) with infinite mean (θ = 40,000 and ξ = 1.1) is shown in Appendix B, Figure B1 to still be a

29

In fact, for any normalized risk measure, the presence of any two of the three properties of convexity, subadditivity, and positive

homogeneity implies remaining third (see Föllmer and Schied, 2011).

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J.D. OPDYKE

**convex function of ξ and a linear function of θ. And corresponding capital simulations in Appendix B (Table
**

B1) demonstrate continued and notable capital bias consistent with Jensen’s inequality, infinite mean

notwithstanding (capital bias of more than 80% and more than 120% over true capital for RCap and ECap,

respectively). These easily replicated results demonstrate that supra-additivity is not a given for very heavytailed severities with some infinite moments, at least for certain parameter values. What’s more, many

practitioners in this setting restrict severities, or severity parameter values, to those indicating finite mean,

arguing that allowing expected losses to be infinite makes no sense for an operational risk capital framework.

This would make moot the issue of the possible supra-additivity of the severity. Others counter that regulatory

requirements dictate the estimation of quantiles, not moments, and that capital models, from a robustness

perspective, should remain agnostic regarding the specific characteristics of a loss distribution’s moments.

**Regardless of the position one takes on this debate, a mathematical proof of VaR’s subadditivity or convexity
**

for all severities relevant to operational risk capital estimation (a group that is not strictly defined) is beyond the

scope of this paper. However, while undoubtedly useful, this is not strictly necessary here, because the number

of such severities in this setting is finite, and checking the subset of those in use by any given financial

institution, one by one, is very simple to do graphically, as was done in Appendix A, Figure A1. Graphical

checks can be complemented with a simple simulation study wherein capital is estimated, say, 1,000 times

based on i.i.d. samples generated from a chosen severity. If the mean of these 1,000 capital estimates is

noticeably larger than the “true” capital based on the “true” severity parameters (where the original parameter

estimates are treated as “true”), and this is consistent with graphing VaR as a function of the parameter values,

then attributing this systemic bias to Jensen’s inequality remains the most plausible, if not highly probable

explanation. 30

Note that it is just as easy to demonstrate the opposite, too, for a given severity. For example, VaR of the

Gaussian (Normal) distribution is a linear function of both of the distribution’s parameters, µ and σ. These

marginal results indicate that Jensen’s inequality likely could never affect capital estimation based on this

distribution. This is shown both graphically in Appendix B, Figure B1, as well as via capital simulation in

Table B1 in Appendix B, 31 which shows no positive capital bias, 32 even for the extremely large quantiles that

are estimated under LDA. Remember, however, that the normal distribution, whether truncated or not, is far too

30

This assumes, of course, that any approximations used to estimate capital are correct and reasonably accurate, and that the simulated

data is i.i.d. to remove any other potential source of bias. See discussion of the former point below.

31

This simulation ignores the need for truncation of the normal distribution at zero as the findings do not change.

32

Very slight negative capital bias due to the estimation of λ, the frequency parameter, is discussed below.

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J.D. OPDYKE

light-tailed to be considered for use in operational risk capital estimation. And this demonstrates that both

characteristics – the medium- to heavy-tailed nature of the severity, and estimation of its very high percentiles

(e.g. p > 0.999) – are required simultaneously for the presumed convexity of VaR to manifest, and thus, for

Jensen’s inequality to bias capital estimates.

To conclude this section on the biasing effects on LDA-based capital most likely attributable to Jensen’s

inequality, we must address the effects of λ on capital, both in the first terms of (2a,b,c) as well as the

subsequent “correction” terms. Recall that λ is the parameter of the frequency distribution, whose default is the

Poisson distribution. 33 For the extremely wide range of severity and frequency parameter values examined in

this paper, capital actually is a concave function of λ, but its (negative) biasing effects on capital estimation are

very small, if not de minimis. This is shown in 216 simulation studies summarized in Table C1 in Appendix C

wherein λ is the only stochastic component of the capital estimate. 34 Bias due only to λ always is negative, but

rarely exceeds -1%, and then just barely. So for all practical purposes VaR is essentially a linear function of λ

in this setting, and any (negative) biasing effect on capital is swamped by the much larger (positive) biasing

effect of the severity parameters on capital, as shown in the Results section below. And regardless, RCE takes

the net effect of both sources of bias into account, as discussed below.

**When Are the Presumed Effects of Jensen’s Inequality Material?
**

When VaR is a convex function of the vector of severity parameters, capital estimates will be biased upwards –

always. But when is this capital inflation material? The most straightforward and reasonable metric for

materiality is the size of the bias, both relative to true capital and in absolute terms. A bias of, say, $0.5m when

true capital is $250m arguably is not worth the concern of those estimating capital (especially if its standard

deviation is, say, $400m, which is actually somewhat conservative). However, it would be hard to argue that a

bias of $200m, $75m, or even $25m was not worth the trouble to address statistically and attempt to at least

mitigate it, if not eliminate it. And in addition to bias that sometimes exceeds 100% of true capital, the dramatic

increase in the skewness and spread of the distribution of capital estimates (as shown in the simulation study

below) alone could be reason enough to justify the development and use of a statistical method to eliminate it,

especially if its implementation is relatively straightforward and fast.

33

Empirically there is rarely much difference in capital regardless of the frequency distribution chosen, and the Poisson is

mathematically convenient as well, so it had become the widely used default. Also note that (2.a,b,c) require only slight modification

to accommodate other reasonable, non-Poisson frequency distributions, such as the Negative Binomial.

34

These simulations cover all severity conditions, and most sample sizes, under which LDA-MLE and RCE are tested later in the

paper.

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J.D. OPDYKE

It turns out there are three factors that contribute to the size of the capital bias (and the other abovementioned

effects on the capital distribution): a) the size of the variance of the severity parameter estimator; b) the

heaviness of the tail of the given severity distribution; and c) the size of the quantile being estimated.

Directionally, larger estimator variance is associated with larger bias; heavier tails are associated with larger

bias, and more extreme quantiles are associated with larger bias. Typically a) is driven most by sample size,

and because larger sample sizes are almost always associated with smaller estimator variance, larger samples

are associated with smaller bias. The choice of severity, typically determined by goodness-of-fit tests, 35 along

with the size of its estimated parameter values drive b). So for example, truncated distributions, all else equal,

will exhibit more bias than their non-truncated counterparts (with the same parameter values). And the choice

of quantile, c), is determined by α in formula (2.a), and α is set at 0.999 for regulatory capital (and typically α =

0.9997, or close, for economic capital, depending on the institution’s credit rating). So ECap will exhibit larger

capital bias than RCap, all else equal.

All of these factors, and the directions of their effects, are consistent with the effects of Jensen’s inequality, and

with VaR as a convex (or convex-dominant) function of the severity parameter estimates, All three, but

particularly a), can be visualized with Figure 1. The smaller the variance of the estimator of the severity

( )

parameter, β, on the X-axis, the less the values of g βˆ can be stretched out above the median, all else equal,

and so the less capital estimates will exhibit bias. In the extreme, if there is no variance, then all we have is β,

the true severity parameter, and there is no bias in our capital estimate (because it is no longer an estimate – it is

true capital). For b) and c), heavier tails, and more extreme quantiles of those tails, both are associated with

greater convexity as shown in Appendix A, Figure A1, so g( ) will be more curved and will “stretch out” the

capital estimates more and increase bias, all else equal.

The effects of sample size on capital bias are shown empirically in Table 2 for sample sizes of approximately

150, 250, 500, 750, and 1,000, 36 corresponding to λ = 15, 25, 50, 75, and 100, respectively, for a ten year

period. The size of the bias relative to true capital is (almost) always greater when the number of operational

35

In this setting these tests typically are empirical distribution function-based (EDF-based) statistics, based on the difference between

the estimated cumulative distribution function (CDF) and the EDF. The most commonly used here are the Kolmogorov-Smirnov

(KS), the Anderson-Darling (AD), and the Cramér-von Mises (CvM) tests.

These are approximate sample sizes because the annual frequency, of course, is a random variable (i.e. λ is stochastic). Because the

Poisson distribution is used for this purpose, the standard deviation of the number of losses is, annually, StdDev = λ , and for a given

number of years, StdDev = # years ⋅ λ .

36

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J.D. OPDYKE

risk loss events in the sample is smaller. 37 Unfortunately, UoM’s with thousands of loss events are not nearly

as common as those with a couple of hundred loss events, or less. So from an empirical perspective, we are

squarely in the bias-zone: bias is material for many, if not most estimations of capital at the UoM level. 38 In

fact, this is exactly what Ergashev et al. (2014) found in their study comparing capital based on shifted vs.

truncated lognormal severity distributions. The latter exhibited notable bias that disappeared as sample sizes

increased up to n = 1,000, exactly as in the simulation study in this paper. However, the authors did not

attribute this empirical effect to an analytical result (i.e. Jensen’s inequality), as is done here.

It is important to explicitly note here the converse, that is, the conditions under which LDA-MLE-based capital

bias apparently due to Jensen’s inequality is not material. This is shown empirically in Table 2 and in the

simulation study below, but general guidelines include a) sample sizes: sample sizes in the low hundreds, which

are most common for operational risk loss event data, will exhibit notable bias, all else equal, while those in the

thousands typically will exhibit much more modest, if any bias, depending on the severity (see Table 2 – three

severities exhibit very little bias for n ≈ 1,000 (λ = 100), while two others exhibit noticeable but arguably

modest bias of around 20% over true capital, and the last exhibits 5%-20% bias, depending on the parameter

values). b) severities: certain severities are more heavy-tailed than others (e.g. LogGamma is more heavy-tailed

than LogNormal, and GPD is more heavy-tailed than LogGamma), and truncated severities, by definition, are

heavier-tailed distributions than their non-truncated counterparts, all else equal (that is, with the same parameter

values). c) parameter values: note that VaR sometimes is a convex function of only one of the parameters of

the distribution (for example, as shown in Appendix A, Figure A1, for the GPD and Truncated GPD

distributions VaR is linear in θ but convex in ξ), so the magnitude of capital bias, apparently, will hinge

primarily on the magnitude of this parameter, all else equal. This can be seen for almost all cases of the GPD

and Truncated GPD distributions in Table 2. Capital is approximately equal in the paired, adjacent rows for

these severities, yet bias is larger for the second row of the pair, where ξ is always larger. The only exception is

where λ = 15 for the Truncated GPD, because sometimes the smaller number of losses decreases capital, on

average, via the decrease in the quantile of the first term of (2.a) more than it increases capital, on average, due

to an increase in parameter variance, so that on net, capital bias actually decreases even though ξ is slightly

larger.

The one exception is the one case (LogNormal, µ = 10, σ = 2) where the smaller sample size (n ≈ 150) decreases capital, on average,

via the decrease in the percentile of the first term of (2.a) more than it increases capital, on average, due to an increase in parameter

variance, so that on net, capital bias actually decreases very slightly.

37

38

Again, this is also confirmed in RMA (2013), which cites the need for “Techniques to remove or mitigate the systematic

overstatement (bias) of capital arising in the context of capital estimation with the LDA methodology”

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J.D. OPDYKE

**TABLE 2: MLE Capital Bias Beyond True Capital by Sample Size by Severity by Parameter Values
**

Severity

Dist.

Parm1 Parm2

µ

σ

LogN

10

2

LogN

7.7

2.55

LogN

10.4

2.5

LogN

9.27

2.77

LogN

10.75

2.7

LogN

9.63

2.97

TLogN

10.2

1.95

TLogN

9

2.2

TLogN

10.7 2.385

TLogN

9.4

2.65

TLogN

11

2.6

TLogN

10

2.8

+ ---------------- RCap % Bias ----------------+

λ = 15 λ = 25 λ = 50 λ = 75 λ = 100

+ ---------------- ECap % Bias ----------------+

λ = 15

λ = 25 λ = 50 λ = 75 λ = 100

6.0%

11.9%

11.3%

14.9%

13.9%

17.9%

18.9%

52.0%

42.9%

64.2%

49.9%

90.9%

6.7%

11.5%

11.0%

13.8%

13.1%

16.1%

11.5%

26.5%

26.4%

39.1%

27.1%

40.2%

3.0% 1.5%

5.4% 3.0%

5.1% 2.8%

6.5% 3.7%

6.2% 3.4%

7.7% 4.4%

8.1% 3.6%

13.9% 7.3%

12.5% 6.0%

20.0% 13.9%

14.8% 9.2%

17.1% 13.2%

1.5%

2.8%

2.7%

3.4%

3.2%

4.0%

2.9%

5.3%

5.2%

8.4%

5.6%

8.8%

7.3%

14.2%

13.5%

17.6%

16.5%

21.1%

24.6%

76.8%

57.2%

87.8%

63.6%

127.3%

7.8%

13.2%

12.7%

15.8%

15.0%

18.5%

14.7%

35.0%

32.4%

51.6%

34.0%

51.5%

3.5% 1.8%

6.2% 3.4%

5.9% 3.2%

7.5% 4.2%

7.1% 3.9%

8.8% 5.0%

10.1% 4.6%

17.7% 9.5%

15.2% 7.4%

24.8% 17.0%

17.7% 11.0%

21.1% 16.1%

1.8%

3.3%

3.1%

3.9%

3.7%

4.6%

3.7%

6.9%

6.4%

10.3%

6.8%

10.8%

Logg

Logg

Logg

Logg

Logg

Logg

TLogg

TLogg

TLogg

TLogg

TLogg

TLogg

a

24

33

25

34.5

25.25

34.7

23.5

33

24.5

34.5

24.75

34.6

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

22.3%

17.8%

26.4%

16.3%

27.9%

19.3%

166.7%

72.7%

110.2%

45.3%

102.1%

40.7%

13.6%

8.5%

15.7%

10.9%

18.3%

13.7%

56.1%

34.1%

60.4%

24.5%

62.9%

24.3%

5.6% 4.4%

3.6% 3.2%

8.3% 5.8%

6.3% 4.0%

9.5% 5.2%

7.1% 3.3%

31.7% 14.6%

13.2% 7.7%

25.8% 16.9%

11.6% 7.7%

23.4% 16.0%

13.6% 8.3%

1.1%

0.4%

1.3%

0.6%

1.6%

0.4%

13.5%

6.6%

9.9%

4.8%

9.9%

4.3%

28.3%

22.2%

33.3%

20.5%

35.2%

24.2%

329.3%

110.5%

169.5%

63.3%

152.3%

55.0%

17.0%

10.7%

19.5%

13.5%

22.5%

16.8%

83.1%

46.1%

84.9%

32.2%

87.6%

31.8%

7.0%

4.6%

10.1%

7.7%

11.6%

8.6%

45.0%

17.7%

34.2%

15.0%

31.2%

17.0%

5.4%

4.0%

7.0%

4.8%

6.4%

4.1%

20.1%

10.3%

22.4%

9.8%

20.6%

10.3%

1.7%

0.7%

1.9%

1.0%

2.2%

0.8%

18.5%

8.8%

13.3%

6.3%

13.2%

5.7%

GPD

GPD

GPD

GPD

GPD

GPD

TGPD

TGPD

TGPD

TGPD

TGPD

TGPD

ξ

0.8

0.95

0.875

0.95

0.925

0.99

0.775

0.8

0.868

0.91

0.92

0.95

θ

35000

7500

47500

25000

50000

27500

33500

25000

50000

31000

47500

35000

80.3%

108.8%

91.1%

105.7%

90.0%

109.5%

81.6%

71.3%

101.2%

93.8%

115.9%

105.6%

56.9%

75.6%

63.7%

73.2%

67.8%

76.4%

52.0%

56.9%

63.0%

68.6%

64.7%

68.2%

30.5%

39.8%

34.8%

39.7%

37.4%

41.6%

25.3%

28.3%

33.1%

34.1%

35.7%

39.0%

14.0%

18.2%

16.1%

18.3%

17.3%

19.3%

14.4%

16.0%

15.8%

17.8%

17.1%

19.1%

119.9%

163.4%

135.9%

158.8%

137.6%

164.9%

127.8%

108.5%

154.8%

146.7%

176.7%

168.6%

81.9%

109.2%

91.9%

105.9%

97.9%

110.7%

75.7%

82.9%

92.0%

100.4%

93.9%

100.8%

41.5%

54.0%

47.3%

53.8%

50.8%

56.5%

34.7%

38.8%

45.5%

46.3%

48.6%

53.7%

23.3%

30.2%

26.5%

30.0%

28.7%

31.9%

23.9%

26.5%

27.7%

30.9%

32.0%

32.8%

18.6%

23.9%

21.3%

24.1%

22.8%

25.3%

19.1%

20.9%

20.7%

23.2%

22.5%

25.1%

17.6%

23.0%

20.0%

22.8%

21.8%

24.3%

17.7%

19.6%

20.6%

23.2%

24.0%

24.6%

*NOTE: #simulations = 1,000; time period = 10 years; for RCap and ECap, α = 0.999 and 0.9997, respectively.

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**Unfortunately there currently are no formulaic rules to determine whether LDA-MLE-based capital bias is
**

material for a given sample of loss event data (and the best-fitting severity chosen), because all of these three

factors – a), b), and c) – interact in ways that are not straightforward. And materiality is a subjective assessment

as well. So the only way to answer this question of materiality is to conduct a simple simulation given the

estimated values of the severity (and frequency) parameters: i) treat the estimated parameter values as “true”

and calculate “true” capital; ii) use the “true” parameter values to simulate 1,000 i.i.d. data samples and for

each of these samples, re-estimate the parameter values and calculate capital for each sample; iii) compare the

mean of these 1,000 capital estimates to “true” capital, and if the (positive) difference is large or at least notable,

then capital bias is material. 39 This is, in fact, exactly what was done for Table 2, which is taken from the

simulation study presented later in this paper.

**Estimators Apparently Affected by Jensen’s Inequality
**

There are a wide range of estimators that have been brought to bear on the problem of estimating severity

distribution parameters in this setting. Examples include maximum likelihood estimation (MLE; see Opdyke

and Cavallo, 2012a and 2012b), penalized likelihood estimation (PLE; see Cope, 2011), Method of Moments

(see Dutta and Perry, 2007) and Generalized Method of Moments (see RMA, 2013), Probability Weighted

Moments (PWM – see BCBS, 2011), Bayesian estimators (with informative, non-informative, and flat priors;

see Zhou et al., 2013), extreme value theory – peaks over threshold estimator (EVT-POT; see ChavezDemoulez et al., 2013), 40 robust estimators such as the Quantile Distance estimator (QD; see Ergashev, 2008),

Optimal Bias-Robust Estimator (OBRE; see Opdyke and Cavallo, 2012a), Cramér-von Mises estimator (CvM –

not to be confused with the goodness-of-fit test by the same name; see Opdyke and Cavallo, 2012a),

Generalized Median Estimator (see Serfling, 2002, and Wilde and Grimshaw, 2013), PITS Estimator (only for

Pareto severity; see Finkelstein et al., 2006), and many others of the wide class of M-Class estimators (see

Hampel et al., 1986, and Huber and Ronchetti, 2009). Which of these generate inflated capital estimates,

apparently due to Jensen’s inequality? The answer is any that would be represented as β on Figure 1, which is

39

It is possible, of course, that the original estimated parameter values based on actual loss data are much larger than the “true” but

unobservable parameter values due simply to random sampling error, in which case bias may not be material. But even in this case,

the parameter values actually used to estimate capital will be the (high) estimates, because these are the best we have: we will never

know the “true” values because we have only samples of loss data, not a population of loss data. And so bias will be material based

on these estimated parameter values and the given sample of loss event data. Over time, unbiased estimates based on larger samples

of data will converge (asymptotically) to true parameter values.

40

Although estimating operational risk capital via EVT-POT was not explicitly tested in this paper for capital bias induced by VaR’s

apparent convexity, it would appear to be subject to the same effects. This approach relies on extreme value theory to estimate only

the tail of the loss distribution which, beyond some high threshold, asymptotically converges to a GPD distribution (see Rocco, 2011,

and Andreev et al., 2009). The estimated parameters of the GPD distribution, however, are generally unbiased (especially if

specifically designed unbiased estimators are used in the case of very small samples; for example, see Pontines and Siregar, 2008). As

such, they can be represented on Figure 1 as β, and thus would provide biased VaR estimates. See Chavez-Demoulez et al. (2013) for

a rigorous application of EVT-POT to operational risk capital estimation.

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to say, apparently all of them. 41 All the relevant estimators at least will be symmetrically distributed, and many,

if not most, will be normally distributed, at least asymptotically (like all M-Class estimators). But normality

most certainly is not a requirement for this bias to manifest (and even symmetry is not a requirement), and so

capital based on all of these estimators will be subject to the same biasing effects outlined above. There is some

evidence that robust estimators generate capital estimates that are less biased than their non-robust counterparts,

and while this intuitively makes sense, unfortunately the mitigating effect on capital bias does not appear to be

large (for some empirical results, see Opdyke and Cavallo, 2012a; Opdyke, 2013; and Joris, 2013). To the

extent that there are differences in the size of the capital bias associated with each of these estimators, the size

of the variance will be the main driver, but given the (maximal) efficiency of MLE, 42 it is safe to say that none

of these other estimators will fare much better, if at all, regarding LDA-based capital bias, ceteris paribus.

**Severities Apparently Affected by Jensen’s Inequality
**

As discussed above, it appears that all severities commonly used in operational risk capital estimation satisfy

the criteria of being heavy-tailed enough, and simultaneously the quantile being estimated is extreme enough,

that the capital estimates they generate are upwardly biased. A number of papers have proposed using mixtures

of severities in this setting, but as shown in Joris (2013), capital estimates based on these, too, appear to exhibit

notable bias. Another common variant is to use spliced severities, wherein one distribution is used for the body

of the losses and another is used for the right tail (see Ergashev, 2009, and RMA, 2013), and often the splice

point is endogenized. Sometimes the empirical distribution is used for the body of the severity, and a

parametric distribution is used for the tail. For these cases, too, we can say that as long as the ultimate estimates

of the tail parameter can be represented as β in Figure 1, the corresponding capital estimates also will exhibit the

same systematic inflation. A simulation study testing the latter of these cases is beyond the scope of the current

paper, but would be very useful to confirm results for spliced distributions similar to those of Joris (2013) for

mixed distributions.

**Reduced-bias Capital Estimator
**

Note that as mentioned above, the median of the capital distribution, if sampled from a distribution centered on

the true parameter values, is an unbiased estimator of true capital, as shown below:

41

One distinct approach proposed for operational risk capital estimation that may diverge from this paradigm is the semi-parametric

kernel transformation (see Gustafsson and Nielson, 2008, Bolancé et al., 2012, and Bolancé et al., 2013). However, in a closely

related paper, Alemany, Bolancé and Guillén (2012) discuss how variance reduction in their double transformation kernel estimation

of VaR increases bias. In contrast, RCE simultaneously decreases both variance and bias in the VaR (capital) estimate.

42

Of course, MLE achieves the maximally efficient Cramer-Rao lower bound only under i.i.d. data sample conditions.

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**From Figure 1, if βˆ is symmetrically distributed and centered on true β (that is, βˆ is unbiased, as is the case,
**

asymptotically, for MLE under i.i.d. data), then:

( )

E βˆ = F −1 ( 0.5 ) , i.e. the mean equals the median, so

( )

g E βˆ = g F −1 ( 0.5 )

And as g[ ] is strictly convex and a monotonic transformation,

( )

F −1 ( 0.5 ) G −1 ( 0.5 ) .

=

g E βˆ g=

So as long as βˆ is unbiased, the median of the capital distribution is an unbiased estimator of capital. In other

words, given a monotonic and strictly convex transformation function (i.e. g( ), or VaR), the median of the

transformed variable (i.e. capital estimates) is equal to the transformation of the original mean (i.e.

(

)

G −1 ( 0.5 ) g=

E βˆ g ( β ) ]) of a symmetric, unbiased variable (e.g. MLE estimates of severity parameters

=

under i.i.d. data). However, this begs the question of unbiased capital estimation, because in reality we have

only one sample and one corresponding vector of (estimated) parameter values, βˆ , and these will never exactly

equal the true severity parameter values, β, of the underlying data generating process. So simply taking the

median of the capital distribution will not work. But this relationship still can be exploited in constructing a

reduced-bias capital estimator, as shown below.

The motivation behind the development of RCE is to design a simple scaler of capital that scales down capital

inflated by Jensen’s Inequality to remove its upward bias. And this scaling factor needs to be a function of the

degree of convexity of VaR for a given severity, its parameter values, the percentile being estimated, and the

sample size of the loss sample. The more apparently convex is VaR, the greater the downward scaling required

to achieve an expected capital value centered on true capital. Both the magnitude of capital bias and the degree

of presumed convexity of VaR, reflected in part in RCE’s “c” parameter, are functions of i) the severity

selected, ii) its estimated parameter values, and iii) the size of the quantile being estimated (e.g. for RCap vs.

ECap). The magnitude of capital bias, although not the degree of presumed VaR convexity, also is a function of

iv) the sample size of the loss dataset, as shown in Table 2 and Figure 1). However, in its current state of

development, c is a function only of the severity selected and sample size, which appear to be the dominant

drivers of capital bias. As shown in the Results section below, when using only sample size and the severity

selected, RCE performs i) extremely well in terms of capital accuracy, eliminating virtually all capital bias

except for a few cases under the smallest sample sizes n ≈ 150, or λ = 15, ii) notably well in terms of capital

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**precision, outperforming MLE by very wide and consistent margins, and iii) consistently, if less dramatically
**

better than MLE in terms of capital robustness. If the size of the quantile mattered, we would see large

differences, for a given value of c, in RCE’s capital accuracy (and precision and robustness) for RCap vs. ECap,

but that is not the case: there is negligible to very little difference (except for a few cases under the smallest

sample sizes of n ≈ 150, or λ = 15). Similarly for the parameter values: for a given value of c, but very

different parameter values of the same severity, we would expect to see large differences in RCE’s capital

accuracy (and precision and robustness), but we do not: RCE’s capital accuracy (and precision and robustness)

is very similar across almost all parameter values of the same severity for a given value of c.

**So while derivation of a fully analytic (yet practical) solution to estimating the degree of VaR’s presumed
**

convexity that relies on all four inputs may be very desirable, especially if it effectively addresses the few

smaller-sample cases where RCE is not completely unbiased (although still much more accurate than MLE), it

does not appear to be immediately essential: RCE effectively addresses MLE’s deficiencies in terms of capital

accuracy and capital precision, and to a lesser degree capital robustness, without identifiable areas in need of

major improvements. So this analytic formula, if even possible to derive in tractable form, 43 is left for future

research.

Finally, it is very important to note that all four of these inputs, i) – iv), and particularly the two currently used

(i.e. the selected severity and sample size), are known ex ante, consistent with capital estimation under the LDA

framework, and so they can be used as inputs to estimating capital using RCE without violating the ex ante

nature of the estimation.

RCE Conceptually Defined: RCE is conceptually defined below in four straightforward steps.

**Step 1: Estimate LDA-based capital using the chosen method (e.g. MLE).
**

Step 2: Use the severity (and frequency) parameter estimates from Step 1, treating them as reflecting the “true”

data generating process, and simulate K data samples and estimate the severity (and frequency)

parameter estimates of each.

43

Note that for their fragility heuristic, a convexity metric in much simpler form than RCE and discussed later in this paper, Taleb et

al. (2012) state: “Of course, ideally, losses would be derived in a closed-form expression that would allow the stress tester to trace out

the complete arc of losses as a function of the state variables, but it is exceedingly unlikely that such a closed-form expression could

be tractably derived, hence, the need for the simplifying heuristic.” The excellent performance of RCE presented below in the Results

section makes the need to derive undoubtedly complex, closed-form expressions for it much less pressing, or arguably even very

useful, with the possible exception of its use under conditions of smaller sample sizes, as discussed below.

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Step 3: For each of the K samples in Step 2, simulate M data samples using the estimated severity (and

frequency) parameters as the data generation process, then estimate capital for each of the M data

samples, and calculate the median of the M capital estimates, yielding K medians of capital.

Step 4: Calculate the median of the K medians of capital, calculate the mean of the K medians of capital, and

multiply the median of medians by the ratio of the two (median over mean) raised to the power “c”:

RCE = Median (K capital medians) * [Median (K capital medians) / Mean (K capital medians)]

c(sev,n)

(3)

The first term of (3) can be viewed as close to the value that would be obtained using Step 1 alone, but it is

more stable and thus, is preferable as it contributes to the stability of RCE. The second term – the ratio of

median over mean – can be viewed as a measure of the apparent convexity of VaR, because the K medians

provide a stable trace of the VaR curve (g( ) in Figure 1), so the ratio of median to mean will decrease below 1.0

(one) as the apparent convexity of VaR increases. This ratio is augmented by c(sev,n), which is a function of

the sample size and the severity selected. Values for c(sev,n) can be determined in one of two ways: i) using

the values provided in Table E1 of Appendix E, by severity by sample size, or ii) using straightforward

simulation study on a case by case basis (as was done to obtain the values in Table E1). Both alternatives are

discussed in more detail in the following section. 44

So conceptually, RCE traces the VaR curve shown in Figure 1, and then uses a simple measure of its presumed

convexity to scale down the capital estimate. The goal is to scale the right amount so that on average, on the Y

axis (i.e. capital estimates), J.I. = E[g( βˆ )] – g(E[ βˆ ]) ≈ 0, or slightly above zero to be conservative. This is

conceptually straightforward, but simulations of simulations (Steps 2 and 3) can be runtime prohibitive,

depending on the sample size and number of UoMs for which capital must be estimated. In the implementation

section below, I present a sampling method (actually, a perturbation method) that speeds this effort by orders of

magnitude and provides even better stability than simple random sampling, especially for UoMs with smaller

sample sizes.

44

It should be noted here that because the first term of RCE is very close to capital based solely on, say, MLE, in a sense RCE can be

viewed as an overlay, calibration, or adjustment to MLE-based capital. If they chose to swap this first term for LDA-based capital,

banks currently using LDA would not have to change anything else in their framework to use RCE other than to apply RCE after Step

1 above. This change would alter the values of c(sev,n) slightly, but this (re)calibration would not be onerous as it is identical to that

described below: only with LDA-based capital as the first term of (3). The only disadvantage to this swap would be a slight increase

in the variance of the capital estimate. Either way, this flexibility is a big advantage of RCE, especially for larger banks with more

data, numerous UoMs, and large frameworks already implemented. Their use of RCE could merely be “on top of” their current

framework: nothing else would need to change.

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J.D. OPDYKE

RCE Implemented

**Step 1: Estimate LDA-based capital using the chosen method (e.g. MLE)
**

Step 2: Iso-Density Sampling – Use the severity parameter estimates from Step 1, treating them as reflecting

the “true” data generating process, and invert their Fisher information to obtain their (asymptotic) variancecovariance matrix. 45 Then simply select 4 * K pairs of severity parameter estimates based on selected quantiles

of the joint distribution of the severity parameters (those used in this paper correspond to the following

percentiles: 1, 10, 25, 50, 75, 90, 99, so K = 7). Each severity parameter of the pair is incremented or

decremented the same number of standard deviations away from the original estimates, in four directions

tracing out two lines of severity parameter values as shown below in Figure 2 (the lines are orthogonal when the

parameters are scaled by their standard deviations). In other words, taking the 99%tile as an example, i) both

severity parameters are increased by the same number of standard deviations until the quantile corresponding to

the 99%tile is reached; ii) both severity parameters are decreased by the same number of standard deviations

until the quantile corresponding to the 99%tile is reached; iii) one severity parameter is increased while the

other is decreased by the same number of standard deviations until the quantile corresponding to the 99%tile is

reached; and iv) one severity parameter is decreased while the other is increased by the same number of

standard deviations until the quantile corresponding to the 99%tile is reached. So we now have K = 7 * 4 = 28

pairs of severity parameter values. But we must also account for variation in λ, the frequency parameter, and so

two values of λ are used in this study: those corresponding to the 25%tile and the 75%tile of the Poisson

distribution implied by the original estimate of λ. So now K = 28 * 2 = 56.

Step 3: Iso-Density Sampling – Using each of the K severity (and frequency) parameter estimates from Step 2

as defining the data generating process, generate via iso-density sampling M = 7 * 4 * 2 = 56 new severity (and

frequency) parameter values for each set of estimates from Step 2, and now calculate their corresponding capital

values. Then calculate the median of these M capital values to end up with K = 56 medians of capital.

Step 4: Using the K medians obtained from Step 3, calculate the median and calculate the weighted mean, 46

and multiply the median of medians by the ratio of the two (median over mean) raised to the power “c”:

45

Note that for many, if not most estimators used in this setting (e.g. M-class estimators), the joint distribution of the severity

parameter estimates will be multivariate normal, and so the initial estimates taken together with the variance-covariance matrix

completely define the estimated joint distribution.

46

Because this is a weighted sampling, the mean is weighted by one minus the percentile associated with a particular iso-density

multiplied by two times one minus that associated with the frequency percentile (since the frequency and severity parameters are

assumed to be independent – see Ergashev, 2008, for more on this topic; weight = [1 – p-sev] * 2 * [1 – p-freq]). Technically the

weighted median should be used alongside the weighted mean, but empirically the weighted median, which requires additional

computational steps, always is identical to the unweighted median here due to the symmetry of the joint parameter distribution. And

so for efficiency’s sake, the unweighted median is used here.

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J.D. OPDYKE

RCE = Median (K capital medians) * [Median (K capital medians) / Mean (K capital medians)]

c(sev,n)

(3)

FIGURE 2: Iso-density Sampling of the Joint Severity Parameter Distribution

**This is a rapid and stable way to systematically perturb parameters, 47 based on the joint (asymptotic) parameter
**

distribution, to obtain a view of capital as a function of VaR. It also is quite accurate, arguably even more

accurate for smaller samples than relying on simple random sampling, which for some of the data samples and

some of the parameter values not uncommon in this setting can lead to truly enormous empirical variability.

Asymptotically, in theory, both approaches are approximately equivalent as long as proper weighting is used

when sampling via iso-densities. But in practice, simple random sampling in this setting can be i) extremely

variable and unstable; ii) often more prone to enormous data outliers than theory would lead one to expect; and

iii) often more prone to enormous estimate outliers because for many heavy-tailed severities, estimation of large

parameter values simply is very difficult and algorithmic convergence is not always achieved. Even though isodensity “sampling” (perturbation) relies on an asymptotic result, it appears to not only be a much faster

alternative, but also a more stable one in this setting, which is characterized by smallish samples and extremely

skewed, heavy-tailed densities (not to mention heterogeneous loss data even within UoMs).

47

Note that the point of iso-density “sampling” is not to draw a representative sample of the joint parameter distribution, but rather, to

systematically perturb parameters for the purpose of tracing VaR as a function of the severity parameters.

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To efficiently obtain the values of the severity parameters on a specified percentile ellipse, 48 one must utilize

knowledge of the joint parameter distribution, or at least its approximation. If using, say, any M-class estimator

to estimate severity parameters, we know the joint (asymptotic) distribution of the estimates is multivariate

normal. With knowledge of the Fisher information of each, 49 therefore, we can use (4), where x is a kdimensional vector of parameter values (incremented/decremented away from μ by the same number of

standard deviations), μ is the known k -dimensional mean vector (the parameter estimates), ∑ is the known

2

covariance matrix (the inverse of the Fisher information of the given severity), and χ k ( p ) is the quantile

function for probability p of the Chi-square distribution with k degrees of freedom.

(x − µ)

T

Σ −1 ( x − µ ) ≤ χ k2 ( p )

(4)

In two-dimensional space, i.e. when k = 2, which is relevant for the widespread use of two-parameter severities

in this setting, this defines the interior of an ellipse, which is a circle if there exists no dependence between the

two severity parameters (if the joint parameter distribution is multivariate normal, a circle will be defined if the

(Pearson’s) correlation is zero). x represents the distance from the parameter estimates, μ. Thus can one find

the values of the severity parameters that provide a specified quantile of the joint distribution with (4). One can

chose points on the ellipse that correspond to movement of each parameter the same number of standard

deviations away from μ by using (5). Simply increment/decrement both parameters by q units of their

respective standard deviations to obtain four pairs on the ellipse: increase both parameters by q standard

z=

1) , decrease both parameters by q standard deviations ( z1 = z2 = −1) , increase one while

deviations ( z=

1

2

−1, z2 =

1) .

decreasing the other ( z1 = 1, z2 = −1) , and decrease one while increasing the other ( z1 =

q # stdev =

χ k2 ( p ) ⋅ (1 + z1 z2 ρ1,2 )

(5)

2

where ssr

1 ( 2 ) = stdev of parameter 1 (2), and 1,2 is the correlation between the parameter estimates. (see

Mayorov, 2014). Alternately, the eigenvalues and eigenvectors of Σ −1 can be used to define the most extreme

parameter values (smallest and largest) on the ellipses (corresponding to the largest/smallest eigenvalues) (see

Johnson and Wichern, 2007), but this would likely change the values of c(sev,n) calculated in Appendix E, and

(5) is arguably more straightforward.

48

The specified percentile represents the percentage of the joint density within the ellipse. For severities with more than two

parameters, and so dimensions higher than two, this is termed an ellipsoid.

49

See Appendix D.

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**Other approaches to mitigating bias due to convexity, typically using bootstraps or exact bootstraps to shift the
**

distribution of the estimator, simply do not appear to work in this setting either because the severity quantile

that needs to be estimated is so extremely large (e.g. [1 – (1-α)/λ] = 0.99999 for ECap assuming λ=30), or

because this quantile is extrapolated so far “out-of-sample,” or because VaR is the risk metric that must be used,

or some combination of these reasons (see Kim and Hardy, 2007). Some that were tested here worked well for

a particular severity for a very specific range of parameter values, but in the end all other options failed when

applied across very different severities and very different sample sizes and very different parameter values.

RCE was the only approach that reliably estimated capital unambiguously better than did MLE under the LDA

framework, 50 across the wide range of conditions examined in this paper (see Simulation Study section below).

**An important implementation note must be mentioned here: when calculating capital based on large severity
**

parameter values, say, the 99%tile of the joint distribution in Step 3, based on 99%tile severity estimates

generated in Step 2, based on (sometimes) already large estimate of severity parameters originally, sometimes

capital becomes incalculable: in this example, the number simply is too large to estimate (in this study, this only

occurred, and rarely, for the severities with the heaviest tails: TGPD and TLOGG). So we need to ensure that

missing estimates do not cause bias: for example, that a scenario cannot occur whereby only the “decrease,

decrease” arm of the iso-density sample in Figure 2 has no missing values. Therefore, if any capital values are

incalculably large on an ellipse, the entire ellipse, and all ellipses “greater” than it, are discarded from the

calculation. This ensures that the necessary exclusion of incalculably large capital numbers do not bias

statistics calculated on the remaining values, which by definition are symmetric around the original estimates.

**Finally, I address here how c(sev, n) is defined and calculated. Table E1 in Appendix E presents values of
**

c(sev, n) by severity by sample size which were empirically determined via simulation studies. The simulation

study simply generated 1,000 RCE capital estimates for a given sample size for a given severity for different

values of c: the value of c that came closest to being unbiased, with a slightly conservative leaning toward small

positive bias, is the value of c used. Sample sizes tested, for a ten year period, included average number of loss

events = λ = 15, 25, 50, 75, and 100 for samples of approximately n ≈ 150, 250, 500, 750, and 1,000 loss

events. 51 This is a very wide range of sample sizes compared to those examined in the relevant literature (see

Ergashev et al, 2014, Opdyke and Cavallo, 2012a and 2012b, and Joris, 2013), and it arguably covers the lion’s

share of sample sizes in practice, unfortunately with the exception of the very small UoM’s. For all sample

50

Again, “better” here means with greater capital accuracy, greater capital precision, and greater capital robustness.

51

As described previously, a Poisson frequency distribution was assumed, as is widespread accepted practice in the industry. Sample

sizes are approximate because they are a function of a random variable, λ. This is described in more detail below.

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J.D. OPDYKE

**sizes in between, from 150 to 1,000, straightforward linear and non-linear interpolation is used, as shown in
**

Figure E1 in Appendix E, and preliminary tests show this interpolation to be reasonably accurate. 52 The Results

section describes in detail the effects of sample size (and severity selected) on RCE-based capital estimates.

The second way to obtain and use values of c(sev, n) is to simply conduct the above simulation study for a

specific sample size and, say, three sets of severity parameters: the estimated pair (for a two-parameter

severity), a pair at the 2.5%tile of the joint parameter distribution (obtained from (4)), and a pair at the

97.5%tile to provide a 95% joint confidence internal around the estimated values. If the same value of c(sev, n)

“works” for all three pairs of severity values, 53 thus appropriately taking into account severity parameter

variability, then it is the right value for “c.” As described in the Results section below, the distribution of RCEbased capital estimates was surprisingly robust to varying values of c(sev, n). In other words, the same value of

c(sev, n) “worked” for very large changes in severity parameters (and capital), and very large changes in

percentiles (e.g. RCap vs. ECap). So determining the value of c(sev, n) empirically in this way, i.e. testing to

make certain that the same value of c(sev, n) holds for ±95% joint confidence interval (or a wider interval if

deemed more appropriate), should properly account for the fact that our original severity parameter estimates

are just that: inherently variable estimates of true and unobservable population values. All sample sizes beyond

the range examined in this paper (i.e. n < 150 or n > 1,000) should make use of this approach, although for

some severities, c(sev, n) may vary by parameter values for small n. So caution is urged in the application of

RCE to smaller samples than studied in this paper. Note again from Table 2 that for larger sample sizes beyond

n ≈ 1,000, all severities will exhibit much less bias because parameter variance is sufficiently small. However,

RCE is extremely useful even in these cases in notably reducing capital variability and increasing model

stability, as discussed further below.

Before addressing RCE runtimes below, I describe two more innovations, in addition to the efficient use of isodensity sampling, that are derived in this paper and that increase runtime speed by nearly an order of magnitude

for one of the severities examined (a fourth innovation related to both runtime speed and extreme quantile

approximation is presented in the next section). The two-parameter Truncated LogGamma distribution

typically is parameterized in one of two ways: either with its second shape parameter, b, specified as b, or

alternatively, 1/b. The latter is used throughout this paper. An analytic expression of the mean of the former is

52

The non-linear interpolation is based on (6) presented in the next section.

53

Here, “works” means that the three means of each of the three capital distributions of 1,000 RCE capital estimates all are very close

to their respective “true” capital values.

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J.D. OPDYKE

provided in Kim (2010), 54 but a corresponding result for the latter does not appear to have been derived in the

literature, so this is done in Appendix D. Also, while the Fisher information of the Truncated LogGamma has

been derived and used for operational risk capital estimation previously (see Opdyke and Cavallo, 2012a, and

for the non-inverted parameterization of the Truncated LogGamma, see Zhou, 2013), both examples rely on

computationally expensive numeric integration, so an analytic approximation is derived and presented in

Appendix D that provides speed increases, for very precise approximations, 55 of between seven and ten times

faster than that required for numeric integration.

**Relying on these innovations, RCE runtimes are shown below in Table 3 by severity by sample size. All
**

analyses presented in this paper were conducted using SAS® on a desktop computer (16GB RAM, 64-bit OS,

CPU @ 3.40GHz). Note that because of the efficient use of the Fisher information and iso-density sampling,

sample size has no effect on runtimes. Runtimes only vary by severity based on the complexity of the Fisher

information and the capital calculation. Most importantly, note that to estimate capital for one UoM,

implementing RCE as described above takes only a second or two, even for severities with the most complex

Fisher informations (e.g. the Truncated LogGamma).

TABLE 3: Runtime Speed of RCE by Severity (seconds)

Non-Truncated

Severity

Real Time

CPU Time

LogNormal

0.14

0.14

LogGamma

1.13

1.12

GPD

0.21

0.18

Truncated (H=$10k)

Real Time

CPU Time

1.10

1.10

2.96

2.94

1.35

1.35

From the above description of RCE, it should be clear that the general approach taken here to developing a

capital estimator that is straightforward to understand, easy to implement, and that works in practice has been

one of reliance on both appropriate theoretical results as well as practical empiricism. This is consistent with

the late George Box’s 56 approach to the development and use of robust methods. Box emphasized that

“practical need often leads to theoretical development” (Box, 1984) and that “to obtain a useful procedure, one

needs both empiricism and theory. But – more than that – one needs continuous iteration between them…”

(Box and Luceño, 1998). This iteration not only guided the development of RCE specifically, and should guide

54

Technically, Kim (2010) provides the conditional tail expectation, which is different from the truncated mean, although the former

simply needs to be multiplied by a constant to obtain the latter. See Appendix D for more details.

55

The largest deviations from true capital when using this approximation in all the simulation studies conducted herein were a few

thousand dollars when true capital was in the hundreds of millions, and sometimes billions of dollars.

56

George Box is widely recognized as one of the fathers of modern, applied statistics. He often is cited as the source of the adage,

“All models are wrong, but some models are useful.”

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J.D. OPDYKE

its further development, but also should guide research on this topic area generally as increased focus is placed

on the capital distribution. As operational risk modelers know, operational risk capital estimation is nothing if

not highly resistant to idealized, textbook solutions that are mathematically convenient and neatly packaged.

Keeping an open mind to pursuing approaches that appropriately balance important theoretical underpinnings

with practical empirical, methodological, and regulatory constraints to arrive at workable, useable solutions for

real world problems is absolutely necessary in this setting, and must drive the research agenda beyond strictly

theoretical work that has limited use in practice.

**RCE Range of Application: Severity Estimators
**

Although RCE can make use of most, if not all severity estimators used in this setting, it is implemented here

essentially as an overlay or calibration to MLE for several reasons. Not only is MLE typically the fastest and

easiest estimator to implement, but also it is most appropriate here for comparability purposes: we must hold all

else constant when comparing RCE to the most widely used alternative, that is, MLE. Then the comparison is

truly “apples-to-apples,” because we know the only difference between the two capital distributions of RCE

(when based on MLE) vs. MLE (used alone) is the use of RCE, and any observed differences are due only to

RCE and cannot be the result of using some other estimator in Step 1 of RCE’s implementation.

**RCE Range of Application: Methods of Extreme Quantile Estimation
**

Another innovation presented in this paper is an improved method for approximating the extreme quantile of the

aggregate loss distribution when the severity distribution can be characterized by infinite mean, or close. 57 As

discussed above, the convolution of the frequency and severity distributions rarely yields a closed-form

aggregate loss distribution from which VaR is easily estimated, but a number of methods for approximating

VaR are widely used. These include mean-adjusted Single Loss Approximation (SLA, see Degen, 2010), Fast

Fourier Transform (FFT, see Embrechts and Frei, 2009), Panjer Recursion (see Panjer, 1981, and Embrechts

and Frei, 2009), extensive Monte Carlo simulation (see Opdyke and Cavallo, 2012a), numeric approximations

(e.g. the Direct Method – see Kato, 2013), Indirect Estimation (see Sahay et al., 2007), and Closed-Form

Approximations (see Hernandez et al., 2013). Extensive Monte Carlo simulation is the gold standard here, but

it remains extremely computationally expensive because the quantiles being estimated are so large, so very

large numbers of simulations are required to adequately represent the extreme empirical tail of the loss

distribution. FFT is stable and faster than Panjer recursion, but mean-adjusted SLA is the most widely used

method as it has the advantage of being a straightforward formula. As such it provides the fastest

57

“Or close” is emphasized here because any method that relies on simulation, as does RCE, will need to work under conditions of

infinite mean upon encountering parameter values that are close to values that induce an infinite mean, because the simulations based

on them will invariably generate some parameter values that correspond to infinite mean severities.

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J.D. OPDYKE

**implementation, especially when testing or comparing estimators which typically requires many simulations.
**

SLA also is widely accepted as being sufficiently accurate (see Hess, 2011; and Opdyke and Cavallo, 2012a).

But it suffers from a serious implementation flaw: it contains divergent roots when, for severities that can have

means approaching infinity (herein, for example, GPD, LogGamma, Truncated GPD, and Truncated

LogGamma), the tail index approaches the value “one,” either from above or below. 58 This is shown in Figure

3 for GPD, with reference to (2.a) and (2.c), below and above ξ = 1, respectively. Importantly, the parameter

values do not need to be very close to “one” for the capital approximation to noticeably diverge from its true

value, 59 so something must be done to address this when relying on data that is fitted to these distributions (or

relying on data simulated from these distributions) to estimate capital. While the indirect method of Sahay et al.

avoids this problem, it requires an additional loop for a root-finding algorithm, and so most likely is slower than

a formula-based approach.

Both the MLE and RCE implementations of LDA in this paper make use of “ISLA” – Interpolated SLA – to

avoid divergence in the capital estimate as tail index values approach one, yet still retain the speed advantages

of a formula-based approximation. ISLA uses a straightforward nonlinear interpolation at predefined starting

and ending points of the tail index values, as shown in (6) below. All notation corresponds to that used in

(2.a,b,c).

Both the precision value (PRE = 1,000) and the root value (Root = 50) were sufficiently accurate in this setting:

estimated capital via ISLA always was within ±1% of estimated capital based on extensive monte carlo

simulation for all severities where infinite means are possible (herein, LogGamma, Truncated LogGamma,

GPD, and Truncated GPD). The example of GPD is shown in Figure 3. Capital is calculated for ξ = 0.8 and ξ =

1.2 (using the estimated value for θ), and if the estimated ξ lies within this range, the interpolated capital value

is used. This straightforward, if brute force method provides very accurate approximations to true capital, and

importantly, is very fast computationally: ISLA is almost an order of magnitude faster than root-avoiding

alternatives that require numeric integration (see Mignola and Opdyke, 2012). Of course, the start and

endpoints for the interpolation must be determined for each severity, and sometimes can vary slightly based on

58

Verifying whether the Closed-Form Approximations of Hernandez et al. (2013) avoid this root divergence is beyond the scope of

this paper.

59

This divergence holds regardless of sample size: it does not disappear asymptotically, that is, even if the number of losses in the

sample approaches infinity. The divergence below ξ = 1 is due to the mean approaching ∞ (see 2.a), and divergence above ξ = 1 is

due to the fact that Γ(s) diverges as s approaches zero from either direction, so Γ(1 – 1/ξ) will diverge as ξ approaches one (see 2.c).

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J.D. OPDYKE

FIGURE 3: Correction for SLA Divergence at Root of ξ = 1 for GPD Severity (θ = 55,000)

Correction terms of Degen (2010)

ECONOMIC

← 2.c) →

2.a) →

interpolation

ξ

← 2.c) →

2.a) →

interpolation

ξ

Economic Capital

Regulatory Capital

Correction terms of Degen (2010)

REGULATORY

2.a) →

2.a) →

← 2.c)

← 2.c)

ξ

ξ

**Low Value of Tail Parameter = LTP = ξ LOW ( = 0.80 for GPD)
**

High Value of Tail Parameter = HTP = ξ HIGH ( = 1.20 for GPD)

1−α

cξ HIGH

High Correction Term = HCT = (1 − α ) F −1 1 −

; ξ HIGH ⋅

λ

1 − 1 ξ HIGH

G 2 (1 − 1 ξ HIGH )

(1 − ξ HIGH )

where cξ HIGH =

2G (1 − 2 ξ HIGH )

**Low Correction Term = LCT = λmm
**

LOW (where LOW is based on ξ LOW )

Precision = PRE = 1,000 ; Root = 50

**Full Range Count = FRC = (ξ HIGH − ξ LOW ) ⋅ PRE
**

Count in Range = CIR = (ξ − ξ LOW ) ⋅ PRE where ξ is estimated from the sample

Difference Root Scale = DRS = [HCT (

1 ROOT )

− LCT (

1 ROOT )

Interpolated Correction Term = ICT = [LCT (

1 ROOT )

] / [FRC − 1]

+ CIR ⋅ DRS]ROOT

1−a

Estimated Capital via ISLA = ≈ F −1 1 −

+ ICT

l

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(6)

J.D. OPDYKE

**the parameter values of the distribution. 60 But determining these values once, visually, is straightforward, as
**

shown in Figure 3, and given the conditional nature of LDA capital estimation (i.e. it is conditioned upon the

selection of a severity distribution first), this does not violate the ex ante nature of the estimation process.

Simulation Study

Framework

This simulation study compares i) LDA-based capital estimates relying solely on MLE for severity and

frequency parameter estimation (the most common implementation of LDA) versus ii) LDA-based capital

estimates generated by RCE implemented as described in the previous section (where MLE is used for the

frequency and severity parameter estimation). One thousand samples of loss data, which are i.i.d. in the

basecase, are simulated to generate one thousand capital estimates, and the characteristics of the two capital

distributions are compared to each other, and to the true capital values. As described above, the three main

criteria examined are capital accuracy (unbiasedness), capital precision (the spread of the capital distribution),

and capital robustness (i.e. distribution characteristics under contaminated, non-i.i.d. data). Accuracy is

determined by the capital bias: simply, are the expected values of the capital distributions close to, or far from

the true capital values? Spread is determined by a number of descriptive statistics, including the standard

deviation, inter-quartile range, coefficient of variation, 95% empirical confidence intervals, and RMSE (which

also incorporates bias) of the two capital distributions. Other important distributional characteristics, such as

the skewness and kurtosis, also are compared. Finally, robustness is determined by an MLE vs. RCE

comparison of deviations from the two respective capital distributions under i.i.d. simulations when non-i.i.d.

data simulations are generated, as described below.

It is very important to note that by both design and necessity, the results from this simulation study assume that

the right model, i.e. the right severity (but of course, not static parameter values), is selected to estimate capital:

the choice of severity in this setting has notoriously low statistical power, and is yet another source of enormous

variance in capital estimation. However, severity selection is a distinct component of the capital estimation

framework, and by design this study focuses on capital estimation conditional on (the right) severity selection,

just as the LDA framework does. To compare capital estimators, by necessity all else must be held constant, so

this study does not examine and include other sources of variance in LDA-based capital from other areas of the

framework (such as severity selection or estimating dependence structure across UoMs).

60

This is true for the LogGamma and Truncated LogGamma, but values of “b” do not approach “one” in this setting, so this is more a

statistical coding precaution than an immediate concern for capital calculation, as it is for GPD (and Truncated GPD) as shown in

Figure 3. Note, too, that only for the GPD does the tail index happen to equal ξ: for the LogGamma, for example, the tail index = 1/b.

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Sample Size

The basecase sample size of losses (n ≈ 250, corresponding to ten years of losses with λ = 25) is conservatively

set a bit larger than that of many UoM’s so that any observed effects of Jensen’s inequality on the MLE-based

capital numbers generally are understated relative to the “typical” UoM (because in relative terms, the effects

almost always increase as sample sizes decrease). Table 2 above shows four additional simulations of the

MLE-based capital estimates for smaller (n ≈ 150) and larger (n ≈ 500, 750, and 1,000) samples to demonstrate

empirically the very strong role that the size of the variance of the severity parameter estimators, vis-à-vis

sample size, plays in biasing capital estimates. 61

**Severity (and Frequency) Distributions
**

Operational risk losses are simulated based on a Poisson frequency distribution, and six of the most commonly

used severity distributions: 62 the LogNormal, LogGamma, and the Generalized Pareto (GPD) distributions, 63 as

well as the truncated versions of each with a truncation threshold of H = $10,000, arguably the most widely

used data collection threshold. As described above, the use of truncated distributions is the most widely

accepted method for addressing data collection thresholds, unlike some alternatives that have been pillared in

regulatory review processes and in the literature (for example, the use of so-called “shifted” distributions – see

Schevchenko, 2009, and Ergashev et al., 2014; but for a counter-argument supporting shifted distributions, see

Cavallo et al., 2012).

**As described above, the implementation of RCE efficiently utilizes the Fisher information, and analytic
**

derivations exist for five of the six severities listed above (see Appendix D, which includes a) definitions of

these severities, b) closed-form analytic expressions for their means for use in calculating capital, and c) their

Fisher informations). For the Truncated LogGamma, a new analytic approximation of the Fisher information is

derived in Appendix D, thus avoiding computationally costly numeric integration. This speeds computer

runtime by almost an order of magnitude, so this approximation is used for this severity for both MLE and

RCE-based capital estimates. Also derived in Appendix D is a closed-form analytic expression for the mean of

61

As mentioned previously, these findings are exactly consistent with other empirical results in the literature (for example, see

Ergashev et al., 2014, and Opdyke and Cavallo, 2012a).

62

See for example, Opdyke, 2013, Opdyke and Cavallo, 2012a, 2012b, Zhou et al., 2013, and Joris, 2013.

63

These are three of the four parametric severity distributions listed in the most recent Interagency Guidance on Operational Risk

AMA severity estimation (see OCC, 2014).

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J.D. OPDYKE

**the Truncated LogGamma severity, 64 which also decreases runtimes over the alternative requiring numeric
**

integration.

**Range of Parameter and Capital Values
**

Severity parameter values for simulating capital were selected i) to reflect values commonly cited in the

literature (see Opdyke and Cavallo, 2012a, 2012b; Joris, 2013, and Zhou, 2013); ii) to reflect a very wide range

of capital values (from $38m to over $10.6b) to better represent the wide range of conditions under which

capital inflation is slightly vs. notably vs. extremely large (sometimes well over 100% greater than true capital),

and to fully test the behavior of RCE; and iii) to reflect different parameter values (of the same severity) while

holding capital roughly constant to demonstrate the different effects of individual severity parameters on

capital, and how these effects are exactly consistent with Jensen’s inequality. The basecase is λ = 25 for ten

years of data, or approximately n ≈ 250. Parameter values generate (true) regulatory capital in the basecase that

ranges from $53m to over $2.7b. While some may consider the upper end of this range large at the level of the

UoM, the bulk of the range actually is fairly conservative for many large banks, and even many regional or midsized banks. For some of the larger sample sizes, however, such as λ = 75 and 100, even though the same

parameter values are used as with the smaller sample sizes, the larger numbers of losses generate capital

numbers that stretch the bounds of what would be seen in practice. Again, the purpose for this was to test the

bounds of RCE, as well as to determine the point at which sample sizes increased enough to notably mitigate

the upward bias of LDA-MLE-based capital. Otherwise, focus should be on the capital numbers corresponding

to λ = 25, which despite their size, correspond to parameter values that are not uncommon in practice, especially

for the larger banks.

**Method of Capital Calculation / Approximation
**

As defined above, the ISLA method is used for approximating the VaR of the aggregate loss distribution to

estimate capital, both for RCE and MLE. To calculate (2.a), analytic formulae for the means of all the

severities used in this study are presented in Appendix D.

Robustness

Robustness of MLE vs. RCE is tested via “left tail,” “right tail,” and “both tail” contamination of the i.i.d.

basecase sample. The left tail distribution is the same severity as the basecase, but with different parameter

values that correspond to the lower 5%tile of the joint parameter distribution (where both basecase parameter

64

Note that Kim (2010) presents an analytic expression for the mean of an alternate parameterization of the truncated LogGamma: his

is based on a Gamma distribution with two shape parameters, rather than a shape parameter and an inverted (b=1/b) shape parameter,

as is used in this paper.

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J.D. OPDYKE

values are decreased 65 by the same number of standard deviations via (5) to obtain these values). The same is

true for the right tail distribution, but with parameter values that both are increased to correspond to the upper

95%tile. This conceptually is the equivalent of a multivariate 90% confidence interval, which is a very

plausible, if not conservative reflection of a non-textbook, non-i.i.d. empirical reality (alternately, Johnson and

Wichern, 2007, can be used to obtain parameter values on the same ellipse corresponding to the largest

eigenvalues). Each contaminating distribution comprises 5%, on average, of the overall severity (and so the

“both tails” case has 5% contamination from each tail, on average (because the percent of the distribution

contaminated is stochastic)).

**While the above addresses violations of the “identical distribution” portion of the i.i.d. assumption,
**

incorporating the effects of violations of the independence assumption on operational risk capital estimation has

been largely ignored in this setting (the few exceptions include Guégan and Hassani, 2013, Umande, 2013, and

Embrechts et al., 2013). This may be due, as least in part, to flexibility on this specific issue in the US Final

Rule (2007). 66 While such testing is beyond the scope of this study, operational risk losses are very likely to be

serially correlated (see Guégan and Hassani, 2013), and other empirical examinations of this issue generally

show that its deleterious effects on statistical inference can be very material (see van Belle, 2008). So this is an

issue that should continue to be further addressed in future research.

RCE parameters

Values of c(sev, n) used are those listed in Table E1. Iso-densities used for sampling correspond to the

percentiles listed above: 1, 10, 25, 50, 75, 90, and 99 for severity parameters, and 25 and 75 for the frequency

parameter. RCE capital is based on severity and frequency parameters estimated using MLE. While RCE can

be applied to capital estimated with almost any estimator, as mentioned above the use of MLE makes “all else

equal” when comparing RCE capital to capital estimated via the most widely used estimator (MLE). In other

words, the only differences must be attributed to RCE. And these differences will have the most direct

relevance to the largest number of financial institutions because most currently are using only MLE.

65

The exceptions to this are the LogGamma and Truncated LogGamma distributions. In this paper, they rely on a Gamma

parameterization with a shape parameter and an inverted (b=1/b) shape parameter, which consequently means that smaller values of b

correspond to larger capital estimates, so b is decreased where all other severity parameters are increased, and vice versa.

66

See US Final Rule (2007), p.69318: “A bank’s chosen unit of measure affects how it should account for dependence. Explicit

assumptions regarding dependence across units of measure are always necessary to estimate operational risk exposure at the bank

level. However, explicit assumptions regarding dependence within units of measure are not necessary, and under many

circumstances models assume statistical independence within each unit of measure. The use of only a few units of measure increases

the need to ensure that dependence within units of measure is suitably reflected in the operational risk exposure estimate.” (emphasis

added).

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J.D. OPDYKE

Results

Results of the simulation study described above can be seen in Tables 4a,b and 5 below, and complete results

can be found in Appendix F in Tables F4a,b-F11a,b. Based on the three criteria that arguably are the only ones

that matter for assessing the effectiveness of an operational risk capital estimation framework – capital

accuracy, capital precision, and capital robustness – the improvements provided by RCE over MLE are,

respectively, nothing short of dramatic, very notable, and modest but consistent. Except for discussions relating

either specifically to sample size or specifically to robustness, below I focus on Tables 4a,b, which is the

basecase of λ = 25 with number of losses n ≈ 250 (each of the tables, including Tables 4a,b as well as F4a,bF8a,b in Appendix F, corresponds to a different sample size related to λ = 25, 15, 50, 75, and 100, respectively;

and “a” and “b” indicate RCap and ECap, respectively. Additionally, Tables F9a,b-11a,b correspond to righttail contamination, left-tail contamination, and both-tail contamination, respectively).

Capital Accuracy

Empirically, we can see that systemically positive bias in MLE-based capital estimates is driven by the three

factors identified above: i) As shown earlier in Table 2, sample size drives parameter estimate variance which

drives MLE-based capital bias: larger sample sizes are associated with smaller bias, all else equal (see Table 2,

and Tables F4a,b-F8a,b). This is exactly consistent with the findings of Ergashev et al. (2014) and Opdyke and

Cavallo (2012a). ii) Higher values of VaR, represented by ECap, always exhibit far more bias than lower

values of VaR, represented by RCap, all else equal (see Table 4a vs. 4b). iii) Heavier tailed distributions exhibit

more bias, all else equal (LogNormal is least heavy, GPD is heaviest, and truncated distributions exhibit more

capital bias than their non-truncated counterparts, all else equal, although by design parameter values vary to

some degree for the truncated and non-truncated versions of the same severity in this study to keep the overall

range of capital estimates at comparable levels) (see Tables 4a,b).

To be more specific regarding iii), consistent with the results of Appendix A, Figure A1, we must note that for

the same severity, capital is roughly the same in each pair of adjacent rows of Tables F4a,b-F8a,b, but MLEbased capital bias is consistently larger for the second row of the pair for the LogNormal distributions and GPD

distributions. For the former, VaR is a convex function of both µ and σ, but the biasing effect of the shape

parameter, σ, dominates over that of the scale parameter (log(µ)), so when σ is the larger of the two for roughly

the same level of capital, capital bias is larger. For the GPD distributions, VaR is a convex function of ξ, but a

linear function of θ, and so the latter induces no biasing effects at all on its own (although it is positively

correlated with ξ). So when ξ is the larger of the two for roughly the same level of capital, capital bias is larger.

The LogGamma, on the other hand, has two shape parameters which are negatively correlated, and VaR is a

convex function of both (see Appendix A, Figure A1). This is why the results are mixed for the LogGamma:

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J.D. OPDYKE

**TABLE 4a: RCE vs. MLE RCap Distributions – Bias and RMSE by Severity by Parameter Values ($millions)
**

Severity

Mean

Mean

RMSE

RMSE

Dist.

Parm1 Parm2

True

MLE

MLE

MLE

RCE

RCE

RCE MLE

RCE

µ

σ

RCap

RCap

Bias

Bias%

RCap

LogN

LogN

LogN

LogN

LogN

10

7.7

10.4

9.27

10.75

2

2.55

2.5

2.77

2.7

$63

$53

$649

$603

$2,012

$67

$59

$720

$686

$2,275

$4

$6

$72

$83

$263

6.7%

11.5%

11.0%

13.8%

13.1%

$63

$54

$658

$614

$2,048

LogN

TLogN

TLogN

TLogN

TLogN

TLogN

9.63

10.2

9

10.7

9.4

11

2.97

1.95

2.2

2.385

2.65

2.6

$1,893

$76

$76

$670

$643

$2,085

$2,198

$85

$96

$847

$894

$2,651

$305

$9

$20

$177

$251

$566

16.1%

11.5%

26.5%

26.4%

39.1%

27.1%

$1,939

$75

$75

$700

$628

$2,123

TLogN

10

a

2.8

b

$1,956

$2,743

$787

40.2%

$1,965

Logg

Logg

Logg

Logg

Logg

24

33

25

34.5

25.25

2.65

3.3

2.5

3.15

2.45

$85

$100

$444

$448

$766

$97

$108

$513

$497

$906

$12

$8

$70

$49

$140

13.6%

8.5%

15.7%

10.9%

18.3%

$87

$99

$455

$452

$799

$2 2.1%

$0 -0.4%

$11 2.5%

$4 0.8%

$32 4.2%

Logg

TLogg

TLogg

TLogg

TLogg

TLogg

34.7

23.5

33

24.5

34.5

24.75

3.07

2.65

3.3

2.5

3.15

2.45

$818

$124

$130

$495

$510

$801

$930

$193

$174

$794

$635

$1,305

$112

$70

$44

$299

$125

$504

13.7%

56.1%

34.1%

60.4%

24.5%

62.9%

TLogg

34.6

ξ

3.07

θ

$867

$1,078

$211

0.8

0.95

0.875

0.95

0.925

35,000

7,500

47,500

25,000

50,000

$149

$121

$391

$403

$643

$233

$212

$640

$697

$1,079

0.99 27,500

$636

33,500

25,000

50,000

31,000

47,500

0.95 35,000

GPD

GPD

GPD

GPD

GPD

GPD

TGPD

TGPD

TGPD

TGPD

TGPD

TGPD

0.775

0.8

0.8675

0.91

0.92

Bias Bias%

RCap

RMSE

RCap

RCap RCE/MLE

0.5%

$25

1.5%

$30

1.4% $355

2.0% $382

1.8% $1,229

$23

$26

$313

$328

$1,063

91.8%

87.7%

88.1%

86.0%

86.5%

$46 2.4% $1,329

-$1 -1.8%

$52

-$1 -1.4%

$88

$30 4.5% $665

-$14 -2.2% $1,087

$38 1.8% $2,568

$1,121

$41

$50

$469

$536

$1,771

84.3%

79.4%

56.9%

70.5%

49.3%

69.0%

0.5% $3,033

$1,694

55.9%

$62

$56

$355

$296

$647

$53

$50

$301

$260

$543

86.0%

89.0%

84.8%

87.6%

83.9%

$841

$137

$130

$516

$539

$848

$23 2.8% $589

$13 10.8% $273

$0 -0.1% $173

$20 4.1% $1,103

$29 5.8% $544

$47 5.9% $1,938

$510

$181

$93

$554

$397

$916

86.6%

66.4%

53.9%

50.2%

73.1%

47.3%

24.3%

$925

$58

6.7%

$927

$709

76.5%

$85

$91

$249

$295

$436

56.9%

75.6%

63.7%

73.2%

67.8%

$152

$124

$396

$408

$645

$3

$3

$5

$5

$1

2.2% $295

2.7% $311

1.2% $870

1.3% $1,019

0.2% $1,535

$167

$156

$466

$513

$792

56.7%

50.3%

53.6%

50.3%

51.6%

$1,121

$486

76.4%

$637

$2

0.3% $1,698

$828

48.8%

$141

$140

$452

$451

$698

$214

$220

$737

$761

$1,149

$73

$80

$285

$309

$451

52.0%

56.9%

63.0%

68.6%

64.7%

$144

$145

$466

$463

$704

$3

$5

$13

$12

$7

2.2% $297

3.3% $315

3.0% $1,062

2.7% $1,174

0.9% $1,668

$170

$179

$576

$603

$888

57.4%

56.8%

54.3%

51.4%

53.2%

$717

$1,206

$489

68.2%

$715

-$2 -0.2% $2,009

$991

49.3%

$0

$1

$9

$12

$37

$9

*NOTE: #simulations = 1,000; λ = 25 for 10 years so n ~ 250; α=0.999

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J.D. OPDYKE

**TABLE 4b: RCE vs. MLE ECap Distributions – Bias and RMSE by Severity by Parameter Values ($millions)
**

Severity

Mean

Mean

RMSE

RMSE

Dist.

Parm1 Parm2

True

MLE

MLE

MLE

RCE

RCE

RCE MLE

RCE

µ

σ

ECap

ECap

Bias

Bias%

ECap

LogN

LogN

LogN

LogN

LogN

10

7.7

10.4

9.27

10.75

2

2.55

2.5

2.77

2.7

$107

$107

$1,286

$1,293

$4,230

$115

$121

$1,449

$1,498

$4,864

$8

$14

$163

$205

$634

7.8%

13.2%

12.7%

15.8%

15.0%

$108

$109

$1,316

$1,333

$4,352

$1

$3

$30

$40

$123

1.1%

$47

2.5%

$66

2.4% $769

3.1% $898

2.9% $2,828

$43

$57

$673

$764

$2,425

91.3%

87.0%

87.4%

85.2%

85.8%

LogN

TLogN

TLogN

TLogN

TLogN

TLogN

9.63

10.2

9

10.7

9.4

11

2.97

1.95

2.2

2.385

2.65

2.6

$4,303

$126

$133

$1,267

$1,297

$4,208

$5,097

$144

$179

$1,678

$1,966

$5,639

$794

$18

$46

$411

$669

$1,431

18.5%

14.7%

35.0%

32.4%

51.6%

34.0%

$4,461

$124

$131

$1,338

$1,264

$4,337

$158 3.7% $3,321

-$2 -1.3% $101

-$2 -1.5% $202

$71 5.6% $1,521

-$33 -2.5% $2,910

$129 3.1% $6,319

$2,769

$77

$97

$1,003

$1,192

$4,072

83.4%

76.1%

48.0%

65.9%

41.0%

64.4%

TLogN

10

a

2.8

b

$4,145

$6,279

$2,134

51.5%

$4,177

$32

0.8% $8,119

$3,972

48.9%

Logg

Logg

Logg

Logg

Logg

24

33

25

34.5

25.25

2.65

3.3

2.5

3.15

2.45

$192

$203

$1,064

$960

$1,877

$225

$225

$1,272

$1,090

$2,300

$33

$22

$208

$130

$423

17.0%

10.7%

19.5%

13.5%

22.5%

$199

$204

$1,105

$978

$1,986

$7

$1

$42

$18

$109

3.4% $163

0.4% $131

3.9% $984

1.8% $734

5.8% $1,842

$137

$115

$814

$631

$1,507

84.1%

87.5%

82.7%

86.0%

81.8%

Logg

TLogg

TLogg

TLogg

TLogg

TLogg

34.7

23.5

33

24.5

34.5

24.75

3.07

2.65

3.3

2.5

3.15

2.45

$1,794

$271

$261

$1,164

$1,086

$1,928

$2,097

$496

$382

$2,152

$1,437

$3,618

$302

$225

$120

$988

$350

$1,689

16.8%

83.1%

46.1%

84.9%

32.2%

87.6%

$1,869

$297

$247

$1,099

$1,158

$1,855

$74 4.1% $1,500

$27 9.9% $903

-$15 -5.6% $458

-$65 -5.6% $3,620

$72 6.6% $1,453

-$74 -3.8% $6,604

$1,273

$530

$191

$1,370

$941

$2,269

84.9%

58.6%

41.6%

37.8%

64.8%

34.4%

TLogg

34.6

ξ

3.07

θ

$1,892

$2,493

$601

31.8%

$2,050

$158

8.4% $2,499

$1,764

70.6%

0.8

0.95

0.875

0.95

0.925

35,000

7,500

47,500

25,000

50,000

$382

$375

$1,106

$1,251

$1,938

$696

$785

$2,123

$2,576

$3,835

$313

$410

$1,016

$1,325

$1,898

81.9%

109.2%

91.9%

105.9%

97.9%

$396

$390

$1,130

$1,279

$1,955

$13

$14

$24

$28

$17

3.5%

3.8%

2.2%

2.2%

0.9%

$1,069

$1,398

$3,514

$4,585

$6,657

$521

$588

$1,594

$1,930

$2,882

48.7%

42.1%

45.4%

42.1%

43.3%

0.99 27,500

$2,076

$4,375

$2,299

110.7%

$2,095

$19

0.9% $8,085

$3,275

40.5%

33,500

25,000

50,000

31,000

47,500

$351

$361

$1,267

$1,334

$2,088

$617

$660

$2,432

$2,672

$4,048

$266

$299

$1,166

$1,338

$1,960

75.7%

82.9%

92.0%

100.4%

93.9%

$365

$379

$1,327

$1,389

$2,129

$13

$18

$61

$55

$41

3.8%

5.0%

4.8%

4.1%

2.0%

$1,109

$1,193

$4,337

$5,165

$7,203

$543

$579

$1,988

$2,203

$3,235

48.9%

48.5%

45.9%

42.6%

44.9%

0.95 35,000

$2,227

$4,474

$2,246

100.8%

$2,246

$19

0.8% $9,606

$3,873

40.3%

GPD

GPD

GPD

GPD

GPD

GPD

TGPD

TGPD

TGPD

TGPD

TGPD

TGPD

0.775

0.8

0.8675

0.91

0.92

Bias Bias%

ECap

RMSE

ECap

ECap RCE/MLE

*NOTE: #simulations = 1,000; λ = 25 for 10 years so n ~ 250; α=0.9997

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J.D. OPDYKE

sometimes a larger value for “a” induces more bias at the same level of capital, and sometimes larger (smaller)

values of “b” induce more bias at the same level of capital.

The bias of MLE-based capital estimates is material for, arguably, every result generated by this simulation

study at λ = 25. Even for the lowest capital bias in absolute terms in Table 4a – $4m corresponding to a true

capital value of $63m under a (non-truncated) LogNormal severity – it is difficult to argue that pushing the

button to implement RCE in under a second is not justified. And capital typically is subject to far greater

inflation – sometimes even more than double true capital in relative terms, or well over $2b beyond true capital

in absolute terms (see Table 4b). The larger numbers generally are more relevant to the larger banks, mainly

because the parameter values of the severities typically are larger for them. But even for the smaller and

medium-sized banks, it is important to remember that these numbers are per UoM. The cumulative effect of

bias from every UoM is likely to be quite large, even for those banks not classified as the largest, and even after

diversification benefits are taken into account. In contrast to MLE-based capital estimates, the accuracy of RCE

is always within ±11% of true capital, except for when λ = 15 where 11 of 72 RCE simulations (about 15%)

deviated more than 11% from true capital (but were still much closer to true capital – see Tables F5a,b).

TABLE 5: Summary of Capital Accuracy by Sample Size – MLE vs. RCE ($millions)

λ=

15

25

50

75

100

15

25

50

75

100

+-------------------- ECap --------------------+

Mean of

Median of

Absolute Bias

Absolute Bias

RCE

MLE

RCE

MLE

7.8%

92.6%

2.6%

82.3%

3.4%

53.1%

3.3%

40.6%

2.8%

25.7%

2.7%

17.7%

1.2%

15.5%

0.8%

10.7%

0.9%

11.3%

0.5%

7.9%

$61

$45

$69

$40

$32

$825

$727

$617

$526

$485

$18

$29

$52

$14

$15

$502

$410

$320

$250

$223

+-------------------- RCap --------------------+

Mean of

Median of

Absolute Bias

Absolute Bias

RCE

MLE

RCE

MLE

5.9%

61.6%

1.6%

58.1%

2.4%

38.1%

2.0%

30.6%

2.0%

19.4%

1.9%

14.3%

0.8%

11.9%

0.5%

8.7%

0.5%

8.7%

0.4%

6.1%

$21

$14

$20

$11

$7

$228

$209

$182

$157

$142

$5

$8

$15

$3

$5

$154

$133

$109

$80

$73

A summary of capital accuracy from Tables F4a,b-F8a,b, in both relative and absolute terms, for MLE and RCE

across sample sizes is shown in Table 5. Obviously this is heavily dependent on the severities used in this study

(although they are the most widely used in practice), but it demonstrates how, even when MLE bias shrinks in

relative terms as sample sizes increase, in absolute terms it remains quite large. RCE bias, in contrast, always is

far smaller. It also is important to note that on average, RCE was slightly larger than true capital. This is

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J.D. OPDYKE

**important from the perspective of conservatism: any estimator should avoid even the appearance of benefiting
**

from use merely to decrease required capital below what is consistent with regulatory intent (which, here, is

estimation closest to the true capital numbers).

In sum, the inflation bias of MLE-based capital estimates can be enormous under conditions that are not

uncommon, and that of RCE typically is small, and often de minimis: except for a few cases of smaller sample

sizes (when λ = 15), RCE essentially and effectively eliminates capital bias due to Jensen’s inequality.

Capital Precision and Model Stability

Model stability long has been cited by many as the most important and most difficult challenge for AMA

operational risk capital estimation. Some of the major factors contributing to model (in)stability in this setting

include the quality of the samples of loss event data (or lack thereof), notable data paucity, the arguably inherent

heterogeneity of operational risk UoM definition, the (non-)robustness of the parameter estimators selected and

used, low statistical power in the choice of severity, and critically, the size of the variance of the output of the

model (here, the capital estimates). Achieving adequate precision in the model output under ideal, textbook

data conditions unarguably is the first step in achieving broader model stability. Put differently, if under

idealized conditions (e.g. perfectly homogenous i.i.d. loss event data) a model framework cannot generate

capital estimates that are precise enough to use to make reliable inferences about the true values of capital, then

there is no way that improving the other components of model stability will ever make a model “stable.” The

starting point for achieving and/or testing for model stability is testing the model when the data satisfies all, or

nearly all of the assumptions required of the model (e.g. i.i.d. data). If a model fails this test, it will never

achieve “model stability,” and so this is the capital precision test applied here to RCE and standalone MLE.

**Capital precision is measured by a number of descriptive statistics of the MLE-based and RCE-based capital
**

distributions, including the standard deviation, the coefficient of variation, the RMSE (which also incorporates

bias), the inter-quartile range, and empirical 95% confidence intervals. Although not statistics of “spread,”

relevant, too, are the skewness and kurtosis of these distributions. By every single one of these criteria, in every

single simulation, RCE is more precise than MLE, and sometimes dramatically so (it also is less skewed and

less kurtotic than MLE in all cases). This is a very strong result, although not unexpected because RCE capital

is essentially scaled MLE capital, where the scaling factor, which is always less than one and greater than zero,

is a function of the degree of apparent convexity of VaR for a given sample size and severity: the more convex

is VaR for a particular estimate, the smaller the value of the scaling factor. Most notably, RMSE of RCE-based

capital estimates is less than half that of MLE-based capital estimates in fully half of the ECap basecase

simulations (see Table 4b). The numbers are similar for the standard deviations of the capital distributions of

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J.D. OPDYKE

RCE vs. MLE, and even the inter-quartile range, which is less affected by MLE’s extreme outliers than is

RMSE or standard deviation, sometimes is less than half the value for RCE compared to MLE. Importantly, the

empirical 95% confidence intervals, which are embarrassingly large for MLE, are much smaller for RCE, on

average only two thirds the size across both the RCap and ECap results; and in one eighth of all cases, they are

less than half the size of those of MLE. By any measure, RCE-based capital estimates are notably more precise

than MLE-based capital estimates.

Capital Robustness

Tables F9a,b-F11a,b in Appendix F show the equivalent of the basecase Tables 4a,b for λ = 25 but with 5%

right-tail contamination, 5% left-tail contamination, and 10% both-tail contamination, respectively, where

contamination 67 comes from the same distribution with parameter values at either end of the 90% confidence

interval of the joint parameter distribution, as described above. For all right-tail contamination simulations, 68

RCE capital still is much less biased than is MLE capital in absolute terms, but this is not what matters when

assessing robustness since the capital distribution is now “wrong” – it no longer represents the original “true”

capital numbers because it is contaminated. What matters is how much capital deviates from their original

estimates under no contamination, i.e. under i.i.d. data samples. The average absolute deviation of MLE

economic capital is 18.9% – more than twice as large as that of RCE economic capital (8.7%). Because ECap is

subject to greater convexity farther out in the right tail, these numbers are larger than the respective RCap

numbers – 11.8% and 6.4% – but this relative difference is still notable. That these differences are not even

larger arguably is mostly a function of RCE’s utilization of MLE as its capital estimator. While this was

necessary for an apples-to-apples comparison to MLE that isolates the effects of using RCE, if RCE was used

with a more robust severity estimator, these differences likely would be larger, ceteris paribus.

For all left-tail contamination simulations, RCE capital again is much less biased than MLE capital in absolute

terms, but what matters is the extent to which capital deviates from the original estimates under no

contamination, i.e. under i.i.d. data samples. For ECap, MLE deviates an average of 9.5% while RCE deviates

an average of 6.5%. The respective numbers for RCap were 7.2% and 5.2%. Because we are dealing with the

estimation of extremely large quantiles, it is not surprising that contamination in the other direction has less

effect on the extent to which either estimator deviated from its i.i.d. values. But again, RCE deviated less.

67

Note again that the %contamination is stochastic.

68

Note that two Truncated LogGamma severities – those with the smallest values of b – required larger percentages of right-tail

contamination to achieve some stability in their estimation. This is not surprising given that this parameter drives the extreme tail of

the distribution, and estimation of such a heavy-tailed distribution is difficult even under i.i.d. conditions when data samples are not

large; so under contaminated conditions, estimation difficulties are not uncommon. This was also true for one of the Truncated

LogGamma distributions and one of the GPD distributions under left-tail contamination.

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J.D. OPDYKE

**Finally, under both-tail contamination, for ECap MLE deviated an average of 6.3% while RCE deviated an
**

average of 3.1%. The respective numbers for RCap were 4.1% and 2.1%.

In sum, while the increased robustness of RCE capital over MLE capital is consistent, is it not as notable as the

strong capital precision gains provided by RCE or the dramatic capital accuracy gains provided by RCE over

MLE. This is at least in part due to the reliance on MLE estimates in this study before the RCE capital

adjustment is applied. Also, the largest robustness advantage of RCE over MLE occurred where robustness

arguably matters most: under non-i.i.d. data in the extreme right tail of the aggregate loss distribution. Finally,

it is worth noting that the deviations violated the expected order of the contaminated simulations more often for

MLE capital than for RCE capital. In other words, for a given severity, in general one would expect a larger

negative deviation under left-tail contamination, a smaller negative or a smaller positive deviation under bothtail contamination, and a large positive deviation under right-tail contamination. But due to random sampling

error these comparisons “crossed over” each other, violating this order 9 of the 72 possible comparisons for

MLE capital. 69 Given the conditions of the estimation exercise this is not surprising. But it is noteworthy that,

in contrast, this happened only 3 times for RCE capital. 70 This is consistent with a more stable, less variable,

and more robust capital estimator.

Discussion

“If you can't measure something, you can't understand it. If you can't understand it, you can't control it. If you

can't control it, you can't improve it.” - H. J. Harrington

**I restate Harrington’s measurement dictum here because operational risk capital modeling is all about
**

measurement, yet it faces serious constraints and obstacles that span the empirical, the methodological, and the

regulatory that make its measurement extremely challenging. As examined in this paper, these constraints often

interact in material and complex ways: estimating an exceedingly large severity quantile (regulatory and

methodological constraint) of medium- to heavy-tailed severities (empirical and regulatory constraint) under

sample sizes that typically are fairly small and rarely “large” (empirical constraint) and subject to biasing effects

apparently due to Jensen’s inequality (methodological constraint) all converge in a perfect storm of estimation

challenges that make what appears to be a fairly straightforward framework (LDA) arguably virtually unusable,

as currently implemented across the industry, for operational risk mitigation purposes because it cannot

69

No results showed a “double” violation, that is, none showed estimated capital from a left-tail deviation that was larger than that

from a right-tail deviation.

70

Under a null hypothesis of 9 “cross-overs” out of 72 comparisons (p = 0.125) and a binomial sample space, the probability of 3 or

fewer cross-overs occurring is only about p = 0.016.

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J.D. OPDYKE

effectively measure and estimate capital. One arrives at this conclusion not only based on the results provided

in this paper, but also according to some of the most respected and established operational risk practitioners (see

OR&R, 2013). Absent any one of the factors listed above, the deleterious effects on capital estimation either

are notably mitigated or disappear altogether, but unfortunately their simultaneous occurrence in any given

UoM is not uncommon, and arguably common.

RCE was designed specifically to address these issues head-on. As shown above, RCE-based capital is

dramatically more accurate, notably more precise, and modestly though consistently more robust than is MLEbased capital. Because RCE uniformly lowers capital requirements at the unit-of-measure level, it must do the

same at the enterprise level, and likewise must increase capital stability from quarter to quarter, ceteris paribus.

This decrease in capital, however, is not merely consistent with regulatory intent, but rather, is arguably more

consistent with regulatory intent than most, if not all other implementations of LDA. We can say this simply

because other implementations generate capital estimates that are systematically and materially biased upwards

under conditions that are not uncommon. Regulatory intent cannot possibly support systemically and materially

biased capital estimation but rather, unbiased capital estimation: in other words, capital estimates that, when

based on multiple samples of loss event data, form a distribution with an expected value that is centered on true

capital. 71 That regulators also would expect this unbiased capital estimator to be reasonably precise and robust

to make reliable inferences about the true values of capital merely is consistent with their stated requirements

for “credible … and verifiable processes … that most effectively enables it [the regulated bank/sifi] to quantify

its exposure to operational risk” (see US Final Rule, 2007).

71

One question raised about the capital distributions of LDA-based MLE vs. RCE is whether the median of the former is closer to

true capital than is that of the latter, even though the mean of the latter is dramatically closer to true capital (which is to say RCE is

essentially unbiased, whereas MLE often is very biased). An empirical examination of all the (i.i.d.) capital distributions generated in

this study (360) shows this to be true: LDA-based MLE is consistently more “median-centered” than is RCE. On its face this might

appear to be a comparative advantage of LDA-based MLE, but one must ask, “At what cost?” By every single measure of spread,

RCE is consistently, if not dramatically more precise than is MLE: always. RCE also is systematically less skewed and less kurtotic

than is MLE. So the cost of MLE’s “median-centeredness” is an extremely long capital tail, which is exactly the thing all operational

risk managers and analysts are trying to avoid the most. Also, we must question whether we are asking the right question: what is

important is not whether a specific quantile (e.g. the median) of a distribution is closer to the true value of the estimate (here, capital),

but rather, whether the entire distribution of a statistic is closer to the true value compared to that of another? RMSE is one metric,

arguably the best one, that answers this question, and the RMSE of RCE is always notably, if not dramatically better (smaller) than

that of MLE. Another way to answer address this issue is to find the cross-over points of the 72 baseline (i.e. λ = 25) capital

distributions: that is, find the percentile at which the right tail of RCE-based capital becomes closer to true capital than does that of

MLE-based capital. A percentile close to the median would indicate a very narrow range over which MLE arguably has any

advantage. And the empirical answer is that all cross-over points are below the 62%tile, and over two thirds are below the 60%tile.

So for the percentiles that matter (i.e. the right tail), RCE capital always is closer to true capital than is MLE capital.

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J.D. OPDYKE

Conclusions

As we have seen above, RCE satisfies all the preferred criteria governing its development listed at the beginning

of this paper. The typical consequences for large banks of using RCE rather than standalone MLE in their LDA

frameworks will be: i) in many cases, notable reductions in capital, both for RCap and ECap, at both the UoM

and enterprise levels; ii) in cases where capital inflation presumably due to Jensen’s inequality is material,

capital dramatically closer to “true” capital as defined by the LDA framework (and thus, capital estimates more

consistent with and closer to that intended by regulators); iii) greater precision in these capital estimates, so

capital will vary less and remain more stable from quarter to quarter, all else equal; and iv) more robustness to

violations of the i.i.d. data assumption that plague even the most well-defined UoM’s.

Smaller and medium-sized banks, whose severity parameter values typically will be smaller, all else equal, still

should enjoy notable reductions in capital when RCE reduces bias across all UoM’s, and they should enjoy the

precision and robustness benefits of RCE as well. And to reemphasize yet again, all these reductions are more

consistent with regulatory intent than are the MLE-based capital estimates under an LDA framework, so RCE

unambiguously provides the proverbial “win-win.” The capital estimator that systematically reduces the

operational risk capital that banks and SIFIs must hold in reserve also is the one that gets to the “right”

regulatory capital number. So there seems to be little to argue against the widespread use of RCE for

AMA(LDA)-based operational risk capital estimation.

Areas of future research related to RCE include: i) Even though RCE dramatically mitigates capital inflation

apparently due to Jensen’s inequality, more needs to be done on the capital precision and capital robustness

fronts. Where MLE-based capital variability is largest, RCE decreases variability the most: for example, for a

GPD severity with ξ = 0.99 and θ = 27,500, as shown on Table 4b, RMSE of MLE-based capital is about $8.1b,

but RMSE of RCE-based capital is only 39% of this value at $3.3b. This is a large relative decrease, but in

absolute terms $3.3b is still a very large number (especially when true capital is $2.1b!), and decreasing it

further is vitally important for the capital planning that banks and SIFIs subject to these regulations must do.

This may be one area, however, where methodological innovation may be limited by what many applied

statisticians would call an ill-posed problem: that is, expecting to estimate severity quantiles associated with p =

0.99999 and higher with anything approaching a reasonable degree of precision. For example, Schevchenko

(2011) uses a very straightforward calculation to show that under reasonable assumptions, even under i.i.d. loss

data, sample size requirements for obtaining reasonable precision in the capital estimate are on the order of

magnitude of a million or more loss events, or 50,000 to 100,000 years worth of loss data. Another way of

stating this is that the variance associated with estimating extremely large quantiles – even taking any effects of

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Jensen’s inequality out of the equation – inherently is extremely large, especially for the heavy-tailed severities

that must be used in this setting. It may therefore take radical innovation and dramatic advances in applied

statistics to even partially circumvent such a daunting challenge.

**ii) A general mathematical proof of VaR’s multidimensional surface convexity for extremely large quantile
**

estimation for all the severities relevant to operational risk capital estimation would be desirable. However, it

arguably is not strictly necessary in this setting since the number of severity distributions “allowed” and used in

practice is quite finite, and the VaR of each at least can be checked for convexity in two straightforward ways:

a) graphical checks for marginal convexity, as is done in Appendix A, Figure A1, and b) via a comparison of

the mean of very straightforward capital simulations to true capital, which is required anyway to determine

whether the size of the parameter estimates makes the capital bias material. Still, additional mathematical

confirmation of these empirical findings would further validate them and more specifically define the conditions

under which they hold.

iii) An analytic derivation of the values of c(sev, n) as a function not only the severity distribution and the

sample size, but also of the severity parameter values and the size of the quantile being estimated could be

useful. If possible, this likely would improve RCE capital estimates under those few smaller-sample conditions

where its bias is not negligible (see Tables F5a,b). And in Tables F6a,b, F7a,b, and F8a,b, we can see some

differences in RCE accuracy by the size of the quantile being calculated, that is, by whether we look at RCap or

ECap. Although RCE still vastly outperforms MLE in all these specific cases, it possibly could be improved if

its value was based on an analytical derivation of its relationship with parameter values and quantile size.

**Additionally, while a derivation of c(sev, n) as an analytic function of sample size would be preferable to the
**

empirical approach used in this paper, this is arguably more desirable than it is necessary because the range

covered here spans most sample sizes where bias is material. This is true, also, of a derivation that holds across

severity distributions because of the conditional nature of capital estimation under LDA: requiring knowledge

of c(sev, n) after the severity has been selected does not invalidate the ex ante nature of the capital estimation.

In the end, analytic derivations supporting empirical results always are preferable to empirical results alone, so

such derivations would at the very least further validate the findings of this study and continue to rightly

encourage focus of the research on operational risk capital estimation on the capital distribution, where it

belongs. So at least for these purposes, such derivations are worth pursuing.

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**iv) As mentioned above, testing RCE’s robustness based on violations of the independence assumption and not
**

just the identically distributed assumption would be useful, especially since operational risk loss event data is

likely to at least sometimes be serially correlated. Testing EVT-POT, spliced distributions, and kernel

transformations for capital bias due to Jensen’s inequality also could be important follow-ons to this paper.

I conclude by tying this research back to the broader operational risk setting with a recent quote from the head

of a major US regulatory agency: “… it [operational risk] is currently at the top of the list of safety and

soundness issues for the institutions we supervise. This is an extraordinary thing. Some of our most seasoned

supervisors, people with 30 or more years of experience in some cases, tell me that this is the first time they

have seen operational risk eclipse credit risk as a safety and soundness challenge. Rising operational risk

concerns them, it concerns me, and it should concern you…” (Thomas J. Curry, Comptroller of the Currency,

OCC, Before the Exchequer Club, May 16, 2012). From the perspective of operational risk capital estimation,

the ominous tone here should trigger alarm based on the fact that the most widely used methods of estimating

operational risk capital (such as MLE) under the most widely used framework (LDA) generate capital estimates

that often are i) demonstrably, materially, and systematically inflated, and thus, utterly inconsistent with

regulatory intent; ii) grossly imprecise by any measure; and iii) based on relatively fragile, mathematically

convenient, idealized textbook assumptions that are consistently violated by real world data.

This paper is the

first to directly and comprehensively address these three issues by not only quantifying them, but also by i)

identifying one of their major analytical sources, ii) specifying exactly the conditions under which they are

material, and then iii) actually designing an approach to address, if not solve them. The broader objective,

however, is to spur related research on these topics and focus more attention on the capital distribution. After

all, capital estimation, not parameter estimation, is the endgame here, and as much time and resources must be

dedicated to this as have been dedicated to research on severity parameter estimation if we are to make the

existing framework more useable and useful in practice, not to mention more consistent with regulatory intent.

Without this focus, the empirical evidence presented herein regarding MLE-based capital estimation under LDA

transforms H. J. Harrington’s aphorism on measurement and improvement into a dire warning that echoes

Curry’s concern. Simply put, we cannot improve business operations by effectively mitigating operational risk

if the capital we estimate to represent it is not measured with reasonable accuracy, reasonable precision, or

reasonable robustness.

In part because this paper began on a critical note, I would like to finish on a thought-provoking methodological

note of optimism by placing RCE, and any similar capital-distribution-based research efforts, in a forwardlooking context. The apparent effects of Jensen’s inequality often are very damaging to capital estimation in

this setting, and the approach taken by RCE is to control and eliminate them. But what if we could go a step

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further and actually exploit them? By this I mean, what if we could develop an estimator that not only mitigates

or eliminates the biasing, imprecision, and non-robustness effects of convexity, but also becomes less rather

than more biased, and more rather than less precise, and more rather than less robust, in the face of convexity?

What if we could develop an estimator whose statistical properties actually improve under conditions of

convexity? It is very telling that until the recent publication of Nicolas Nassim Taleb’s book “Antifragile:

Things that Gain from Disorder” (Taleb, 2014), there was not even a word to describe an estimator with such

“antifragile” characteristics (note that “antifragility” is very distinct from “robustness”). 72 But such an

“antifragile” estimator would be enormously useful in this and many other risk settings where convexity is

common, if not endemic, and plagues the effective use of a number of the most commonly used risk metrics

(expected shortfall included), whether or not their users are aware of it (the need for this paper is a case in

point). So regarding convexity and its deleterious effects on estimation generally, for capital and otherwise, we

should aim high: first we must test for it, identify it, and measure it; then we must develop estimators like RCE

to control it and in many ways, eliminate it; and finally, an ultimate goal would be to exploit it using

“antifragile” estimators that actually improve when confronting it.

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APPENDIX A

(note that the leftmost graphs in Figure A1, when scaled independently, exhibit notable convexity (except for

GPD θ, which is linear))

FIGURE A1: LogNormal Parameter µ by Quantile by α, Parameter σ = 2, Threshold=$0

Parameter µ

LogNormal Parameter σ by Quantile by α, Parameter µ = 10, Threshold=$0

Parameter σ

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LogGamma Parameter a by Quantile by α, Parameter b = 2.65, Threshold=$0

Parameter a

LogGamma, Parameter b by Quantile by α, Parameter a = 24, Threshold=$0

Parameter b

GPD Parameter ξ by Quantile by α, Parameter θ = 35,000, Threshold=$0

Parameter ξ

GPD, Parameter θ by Quantile by α, Parameter ξ = 0.8, Threshold=$0

Parameter θ

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APPENDIX B

TABLE B1: Regulatory and Economic Capital Distributions, 1,000 Simulations λ=25

GPD Severity (ξ = 1.1, θ = 40,000)

True Capital

Mean

%Bias

RMSE

StdDev

IQR

95%CIs

Skewness

Kurtosis

RCap (α = 0.999)

$2,521,620,617

$4,606,994,975

82.70%

$7,809,076,769

$7,525,193,727

$3,830,876,336

$22,811,712,755

5.65

48.80

Normal Severity (µ = 500k, σ = 1.5m)

ECap (α = 0.9997)

$9,432,295,763

$20,895,168,520

121.53%

$43,461,854,111

$41,921,400,048

$16,636,357,991

$117,827,228,494

6.72

66.47

RCap (α = 0.999)

$18,916,600

$18,890,719

-0.14%

$2,583,208

$2,583,078

$3,449,874

$9,948,476

0.14

0.07

ECap (α = 0.9997)

$19,336,006

$19,310,226

-0.13%

$2,584,629

$2,584,501

$3,459,729

$9,963,910

0.14

0.06

**(GPD Graphs ξ = 1.1, θ = 40,000 are virtually identical to GPD graphs in Appendix A above)
**

FIGURE B1: Normal, Parameter µ by Quantile by α, Parameter σ = 1,500,000, Threshold=$0

Parameter µ

Normal, Parameter σ by Quantile by α, Parameter µ = 500,000, Threshold=$0

Parameter σ

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J.D. OPDYKE

APPENDIX C

TABLE C1: MLE-LDA for Economic and Regulatory Capital Estimation Varying λ Only*

Severity

ECap Bias

RCap Bias

Dist.

Parm1 Parm2 λ = 15

λ = 25 λ = 100

λ = 15

λ = 25 λ = 100

µ

σ

LogN

10

2

-1.0%

-0.6%

-0.2%

-1.1%

-0.6%

-0.2%

LogN

7.7

2.55

-1.1%

-0.7%

-0.2%

-1.1%

-0.7%

-0.2%

LogN

10.4

2.5

-1.1%

-0.7%

-0.2%

-1.1%

-0.7%

-0.2%

LogN

9.27

2.77

-1.1%

-0.7%

-0.2%

-1.1%

-0.7%

-0.2%

LogN

10.75

2.7

-1.1%

-0.7%

-0.2%

-1.1%

-0.7%

-0.2%

LogN

9.63

2.97

-1.0%

-0.7%

-0.2%

-1.0%

-0.6%

-0.2%

TLogN

10.2

1.95

-1.0%

-0.6%

-0.2%

-1.0%

-0.6%

-0.2%

TLogN

9

2.2

-1.1%

-0.6%

-0.2%

-1.1%

-0.6%

-0.2%

TLogN

10.7 2.385

-1.1%

-0.7%

-0.2%

-1.1%

-0.7%

-0.2%

TLogN

9.4

2.65

-1.1%

-0.7%

-0.2%

-1.1%

-0.7%

-0.2%

TLogN

11

2.6

-1.1%

-0.7%

-0.2%

-1.1%

-0.7%

-0.2%

TLogN

10

2.8

-1.1%

-0.7%

-0.2%

-1.1%

-0.7%

-0.2%

Logg

Logg

Logg

Logg

Logg

Logg

TLogg

TLogg

TLogg

TLogg

TLogg

TLogg

a

24

33

25

34.5

25.25

34.7

23.5

33

24.5

34.5

24.75

34.6

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

-1.0%

-1.0%

-0.9%

-1.0%

-0.9%

-1.0%

-1.0%

-1.0%

-1.0%

-1.0%

-0.9%

-1.0%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-1.0%

-1.0%

-0.9%

-1.0%

-0.9%

-1.0%

-1.0%

-1.0%

-0.9%

-1.0%

-0.9%

-1.0%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.6%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

GPD

GPD

GPD

GPD

GPD

GPD

TGPD

TGPD

TGPD

TGPD

TGPD

TGPD

ξ

0.8

0.95

0.875

0.95

0.925

0.99

0.775

0.8

0.8675

0.91

0.92

0.95

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

-0.8%

-0.4%

-0.6%

-0.4%

-0.5%

-0.3%

-0.8%

-0.8%

-0.6%

-0.5%

-0.5%

-0.4%

-0.5%

-0.3%

-0.4%

-0.3%

-0.3%

-0.2%

-0.5%

-0.5%

-0.4%

-0.4%

-0.3%

-0.3%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.1%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.8%

-0.4%

-0.6%

-0.4%

-0.5%

-0.3%

-0.8%

-0.8%

-0.6%

-0.5%

-0.5%

-0.4%

-0.5%

-0.3%

-0.4%

-0.3%

-0.3%

-0.2%

-0.5%

-0.5%

-0.4%

-0.4%

-0.3%

-0.3%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.1%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

-0.2%

*NOTE: #simulations = 1,000; α=0.999 and 0.9997 for RCap and ECap, respectively.

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J.D. OPDYKE

APPENDIX D

PDF, CDF, Mean, and Inverse of Fisher information for Six Severities

LogNormal PDF and CDF:

f ( x; µ ,σ ) =

1

2π σ x

e

1 ln ( x ) − µ

−

2

σ

2

1

F

x

;

µ

,

=

σ

1 + erf

(

)

and

2

ln ( x ) − µ

for 0 < x < ∞ , 0 < σ < ∞

2

2

σ

LogNormal Mean:

( µ +σ 2 )

E(X ) = e

2

LogNormal Inverse of Fisher information:

A (θ )

−1

σ 2 0

=

2

0 σ / 2

**Truncated LogNormal PDF and CDF:
**

g ( x; µ ,σ ) =

where f

( )

f ( x; µ ,σ )

1 − F ( H ; µ ,σ )

and

G ( x; µ ,σ ) = 1 −

is LogNormal PDF and F (

)

1 − F ( x; µ ,σ )

for H < x < ∞ and 0 < σ < ∞

1 − F ( H ; µ ,σ )

is LogNormal CDF.

Truncated LogNormal Mean:

E=

(X ) e

+ 2 2

ms

ms

+ 2 − ln ( H )

1

where F ( ) is the standard normal CDF.

⋅F

⋅

1 − F ( H )

s

**Truncated LogNormal Inverse of Fisher information:
**

Let u =

INV =

ln ( H ) − µ

σ

−u 2 2

j

j=

,=

, J 1 − F u where F is the CDFof the Standard Normal, and

( )

2π

σ2

(

)

2 + J ⋅ ( J − u ) ⋅ u ⋅ ( J − u ) − 3 then

(

)

(

)

2 + J ⋅ u ⋅ 1 − u ⋅ ( J − u ) J ⋅ u ⋅ ( J − u ) − 1

−1

A (θ=

INV

⋅

)

J ⋅ u ⋅ ( J − u) −1

1− J ⋅(J − u)

(

)

(

)

from Roehr (2002) (Note that the first cell of this matrix as presented in Roehr (2002) contains a typo: this is

corrected in the presentation above).

Generalized Pareto Distribution (GPD) PDF and CDF:

θ)

f ( x; x ,=

1

x

1+ x

θ

θ

1

− −1

x

x

and F ( x; x ,θ ) =1 − 1 + x θ

1

−

x

assuming x ≥ 0, for 0 ≤ x < ∞; 0 < θ < ∞

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J.D. OPDYKE

GPD Mean:

=

E(X )

θ

1−ξ

for ξ <1

( = ∞ for ξ ≥ 1)

**GPD Inverse of Fisher information:
**

A (θ ) =

−1

1 + ξ − θ

2θ 2 from Smith (1987).

(1 + ξ ) −θ

**Truncated GPD PDF and CDF:
**

g ( x; x ,θ ) =

f ( x; x ,θ )

1 − F ( H ; x ,θ )

and

G ( x; x ,θ ) = 1 −

1 − F ( x; x ,θ )

1 − F ( H ; x ,θ )

assuming x ≥ 0, for H ≤ x < ∞; 0 < θ < ∞ , where f

( )

is GPD PDF and F (

)

is GPD CDF.

**Truncated GPD Mean:
**

θ 1 − F ( H )

E ( X ) =⋅

ξ 1 − ξ

−ξ

− 1 for ξ <1 ( = ∞ for ξ ≥ 1)

H +θ

for ξ <1 ( = ∞ for ξ ≥ 1) .

1−ξ

=

As per Mayorov (2014), this also can be represented

as E ( X )

**Truncated GPD Inverse of Fisher information:
**

(1 + ξ )

−1

A (θ ) = (1 + ξ ) ⋅

−θ 1 + (1 + 2ξ ) H

θ

2

H

H

θ 2 2 + 2 (1 + 2ξ ) + (1 + ξ )(1 + 2ξ )

θ

θ

H

− θ 1 + (1 + 2ξ )

θ

from Roehr (2002).

LogGamma PDF and CDF: 73

f ( x; a, b ) =

(

b a log ( x )

)

( a −1)

Γ ( a ) x b +1

and F ( x; a, b ) =

x

∫

1

(

b a log ( y )

)

( a −1)

Γ ( a ) y b +1

dy for 1 ≤ x < ∞; 0 < a; 0 < b where Γ(a)

**is the complete gamma function.The domain can be changed to µ ≤ x < ∞ if a location parameter, µ, is added
**

and x – µ is substituted for x (so if µ = 1, the domain would range from zero and approach positive infinity).

LogGamma Mean:

b

E(X )

=

b −1

a

for b > 1 ( = ∞ for b ≤ 1)

LogGamma Inverse of Fisher information:

73

Note that this parameterization of the two-parameter LogGamma is the inverted parameterization (b = 1/b).

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**

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J.D. OPDYKE

A (θ ) =

−1

(

a / b2

1/ b

74

2

2 1 / b trigamma a from Opdyke and Cavallo (2012a).

( )

a / b ⋅ trigamma ( a ) − 1 / b

1

)

**Truncated LogGamma PDF and CDF:
**

g ( x; a, b ) =

f ( x; a, b )

1 − F ( H ; a, b )

and

G ( x; a, b ) = 1 −

for 1 ≤ x < ∞; 0 < a; 0 < b , where f

( )

1 − F ( x; a, b )

1 − F ( H ; a, b )

is LogGamma PDF and F (

)

is LogGamma CDF.

Truncated LogGamma Mean:

(

)

a

b 1 − J log ( H )( b − 1) ; a,1

E ( X=

for b > 1, = ∞ for b ≤ 1, where J ( ) is the CDF of the Gamma distribution

)

⋅

1 − F ( H )

b −1

Although Kim (2010) presents a derivation of the conditional (tail) mean for the LogGamma with direct

**parameterization (as opposed to LogGamma with inverted (1/b) parameterization as shown above and as used in
**

this paper), the above mean for the Truncated LogGamma does not appear to have been presented in the

literature previously and its derivation is shown below. It is known that for J( ) Gamma CDF,

Γ ( a, x )

1 − J ( x; a, b =

1) = where Γ ( a, x ) is the upper incomplete gamma function and Γ (

Γ(a)

) is the complete gamma function.

Also, the tail mean (i.e. mean beyond the threshold, H, as opposed to the mean of the truncated distribution) of

(

a

b Γ a, Log ( H )( b − 1)

−

the LogGamma is TM ( H ) =

∫ y ⋅ f ( y; a, b ) dy =⋅

Γ(a)

b 1

H

∞

)

**Therefore, because Mean of Truncated Distribution = TM(H) / (1-F(H)),
**

a

1

b

Mean of Truncated LogGamma = b − 1 ⋅ 1 − J log ( H )( b − 1) ; a,1 ⋅ 1 − F H

( )

(

)

b 1 − F ( H ; a, b − 1)

As per Mayorov (2014), this also can be represented as b − 1 ⋅ 1 − F ( H ; a, b ) .

a

**Truncated LogGamma Inverse of Fisher information:
**

A (θ )

−1

A B

=

B D

−1

where

A trigamma ( a ) −

H

∫ ln ( b ) + ln ln ( x ) − digamma ( a ) f ( x ) dx

1+

(

)

1 − F ( H ; a, b )

2

2

74

The digamma and trigamma functions are the first and second order logarithmic derivatives of the complete gamma function:

digamma(z) = d/dz ln [Γ(z)] and trigamma(z) = d 2/dz2 ln [Γ(z)].

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**

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J.D. OPDYKE

H

−

(

)

**1 − F ( H ; a, b ) ⋅ ∫ ln ( b ) + ln ln ( x ) − digamma ( a ) − trigamma ( a ) f ( x ) dx
**

+

2

1

1 − F ( H ; a, b )

B=

−

1

−

b

2

1

1 − F ( H ; a, b ) ⋅ ⋅ F ( H ; a, b )

b

1 − F ( H ; a, b )

2

−

a

1 − F ( H ; a, b ) ⋅ ∫+ ln ( b ) + ln ln ( x ) − digamma ( a ) ⋅ b − ln ( x ) f ( x ) dx

1

−

a

∫+ ln ( b ) + ln ln ( x ) − digamma ( a ) f ( x ) dx ⋅ ∫+ b − ln ( x ) f ( x ) dx

1

1

H

(

)

1 − F ( H ; a, b )

H

(

2

H

)

1 − F ( H ; a, b )

2

H

H a

2

a ( a − 1) 2a ln ( y )

−

+ ln ( y ) f ( x ) dx

∫ − ln ( y ) f ( x ) dx + 1 − F ( H ; a, b ) ⋅ ∫

2

b

b

a 1+ b

1+

D

=

−

2

2

b

1 − F ( H ; a, b )

2

from Opdyke and Cavallo (2012a). 75

Zhou (2013) presents the equivalent of the above for the direct parameterization of the LogGamma,, but this,

too, requires computationally expensive numeric integration.

**Below I present an analytic approximation for the Fisher information of the Truncated LogGamma (inverted
**

parameterization) that avoids numeric integration, and as a consequence, is over seven times faster to

implement. For applications in this paper, the accuracy of the matrix terms, using η = 0.001 (described below),

ranges from eight to eleven decimal places, which is very sufficient for purposes of estimating operational risk

capital (that is to say, no more than a few thousand dollars divergent from estimated capital that is hundreds of

millions, or even billions of dollars).

A (θ )

−1

A B

=

B D

−1

where

Note that the domain of the threshold, H, is 1 ≤ H < ∞ instead of 0 ≤ H < ∞ to avoid having to include a third location parameter for

the LogGamma. The numeric effects of this mathematical convenience are de minimis, if even calculable. The same convention is

used throughout the derivation of the analytic approximation for the Fisher information of the Truncated LogGamma, where the

threshold is labeled “t” rather than H.

75

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**

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J.D. OPDYKE

A= −

**MeijerG[{{},{1,1}},{{0,0, a},{}}, bLog[t ]]2 − 2G[a, bLog[t ]]MeijerG[{{},{1,1,1}},{{0,0,0, a},{}}, bLog[t ]]
**

G[a, bLog[t ]]2

−1 +

B=

**t − b MeijerG[{{},{1 + a,1 + a}},{{a, a, 2a},{}}, bLog[t ]]
**

G[a, bLog[t ]]2

b

=

D t −3b (1 + (−1 + a )t b ExpIntegralE[2 − a, bLog[t ]]) ×

**(−1 + t b ExpIntegralE[1 − a, bLog[t ]](1 − a + at b ExpIntegralE[1 − a, bLog[t ]] + bLog[t ]))
**

×

b3 ExpIntegralE[1 − a, bLog[t ]]3 Log[t ]

where

**Γ ( a, x ) is the upper incomplete gamma function,
**

MeijerG[{{a1,..., an},{a ( n + 1) ,..., ap}},{{b1,..., bm},{b ( m + 1) ,..., bq}}, z ] =

(

∏ Γ bj + s

)∏ Γ (1 − a

∏ Γ(a

) ∏ Γ (1 − b

m

1

=

j

=

p

∫

2p i γ L

m

1 =j 1

q

+s

j

j=

n +1

j

−s

j

j=

m +1

)

−s

)

x − s ds

, and under certain conditions, in terms of generalized

hypergeometric functions

m

m

∑

h =1

(

)

n

(

)

∏ Γ b j − bh * ∏ Γ 1 + bh − a j z bh

j 1 =j 1

q

∏ Γ (1 + b

−b

h

j

j=

m+1

) ∏ Γ (a

p

−b

)

j

h

j=

n +1

1 + bh − a p

× p Fq−1

1 + bh − a p

(

)

*

|( −1)

p −m−n

z

and

∞

e − zt

ExpIntegralE[n, z ] = ∫ n dt = z n −1Γ (1 − n, z )

1 t

Unfortunately, the MeijerG[ ] function converges too slowly, when used with values relevant to this setting, to

be used by non-symbolic programming languages, that is, all statistical and computer programming

languages. 76 In other words, the terms of the MeijerG[ ] become too small (i.e. less than 10E-16) to calculate

for the computer chips on most modern computers, but we cannot discount these terms as they are not rapidly

76

Mathematica is the major symbolic programming language that can correctly execute such calculations, but it is not as useable as

the major statistical programming languages for nontrivial volumes of empirical statistical analyses, as are required for operational

risk capital estimation. So these calculations must be put into terms that all major statistical programming languages, and most

modern computer chips, can successfully calculate with sufficient precision.

**CURRENT DRAFT MANUSCRIPT, October 2013
**

Page 59 of 63

J.D. OPDYKE

**divergent and notably affect the final result of the calculation. To circumvent this obstacle to practical
**

usage, A (θ ) can be expanded as below:

−1

A

1

)

(

a Γ a, bLog t

4

(

2

×

) ) ⋅ ( bLog t )

× − GHG {a, a} ,{a + 1, a + 1} ; −bLog t

(

(

)

(

)

2

2a

(

)

**+2a bLog t ⋅ −G a, bLog t ⋅ GHG {a, a, a} ,{a + 1, a + 1, a + 1} ; −bLog t
**

a

)(

(

)

)

(

**+ aG ( a ) ⋅ GHG {a, a} ,{a + 1, a + 1} ; −bLog t ⋅ Log bLog t − digamma ( a )
**

(

)) (

)

2

+ a 4Γ ( a ) − Γ ( a ) − Γ a, bLog t ⋅ Log bLog t − digamma ( a ) + Γ a, bLog t ⋅ trigamma ( a )

B

(

1

(

)

a 2b Γ a, bLog t

{

2

(

)

(

)(

)

)

(

{

2a

) ( Log ( bLog t ) − digamma ( a ) )

2

− a 2 t b Γ a, bLog t + Γ ( a ) bLog t

D

)

×

t − b ⋅ GHG {a, a} ,{a + 1, a + 1} ; −bLog t ⋅ bLog t

(

(

a

(

)

(

)

a

× t −3b Γ a − 1, bLog t Log t + bLog t ×

b3 Log t Γ a, bLog t

1

(

)

3

2

× at 2b Γ a, bLog t − bLog t

(

)

(

)

2a

(

) (1 − a + bLog t )

)(

+ t 2b Γ a, bLog t bLog t

2a

which reduces to

(

)(

(

a

)

(

(

)

2a

−b

t −2b bLog t

a t bLog t 1 − a + bLog t

D=

+

−

2

b2

b 2Γ a, bLog t

b 2 Γ a, bLog t

)

)

where

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**

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J.D. OPDYKE

( a1)n ...( ap )n

GHG ({a1,..., ap} ,{b1,..., bq} ; z ) = ∑

n = 0 ( b1) n ... ( bq ) n

∞

zn

,

n!

where ( a )n= a ( a + 1)( a + 2 ) ... ( a + n − 1) , ( a )0= 1 , is the generalized hypergeometric function.

**Unfortunately, the generalized hypergeometric function suffers from the same usability challenge as does the
**

MeijerG[ ] function: the terms become too small (i.e. less than 10E-16) to calculate for the computer chips on

most modern computers, but these terms are material to the final result as they are not rapidly divergent.

Fortunately, identities for the generalized hypergeometric function exist that contain terms similar to those

found in the Fisher information above. For example,

q

aj

,

1;

GHG {a1,..., ap} ,{a1 + 1,...,=

ap + 1} ; z

GHG

ak

ak

z

+

⋅

(

)

∑

∏

−

a

a

k =1

=

≠

1,

j

j

k

j

k

(

)

q

and

G ( a, − z )

−a

GHG ( a, a + 1; z ) =

G ( a + 1)( − z ) 1 −

a

G

(

)

The only problem with using these two identities to provide the generalized hypergeometric function in terms

that can be readily calculated using most computer hardware and software (that is, non-symbolic programming

languages) is that in our case, a1 = a2 = … = ap = a, so the last product term is undefined (i.e.

aj

aj − aj

=

aj

0

~ undefined ). Consequently, I use these identities to approximate the Fisher information by

increasing and decreasing values for a1 and a2 and a3 by a small amount, η (=0.001). This yields values of the

elements of the Fisher information that deviate from true values by between eight and eleven decimal places,

which as mentioned above, is very sufficient for purposes of estimating operational risk capital (that is to say,

no more than a few thousand dollars divergent from estimated capital that is hundreds of millions, or even

billions of dollars).

Also, we saw in deriving the mean of the truncated LogGamma severity above that the upper incomplete

(

1)

Γ ( s ) ⋅ 1 − J ( x; s, b =

gamma function Γ ( s, x ) =

)

where J( ) is the CDF of the Gamma distribution, so

this can be used to provide the upper incomplete gamma function in readily calculable terms.

Substituting both of the above term changes into the Fisher information, let

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**

Page 61 of 63

J.D. OPDYKE

a = parameter 1; b = parameter 2; t = threshold; η = 0.001 ; adown= a − η ; aup= a + η ; z = −bLog t

Γ ( a + 1)

=

=

divide

a diva

(−z)

a

Γ ( adown + 1)

= divad

=

divide adown

;

(−z)

adown

=

divide=

aup divau

;

Γ ( aup + 1)

(−z)

aup

so

GHG=

2 divad ⋅ J ( − z; adown,1)

aup

adown

+ divau ⋅ J ( − z; aup,1)

aup − adown

adown − aup

aup

a

adown aup

+ diva ⋅ J ( − z; a,1)

GHG=

3 divad ⋅ J ( − z; adown,1)

adown − a aup − a

aup − adown a − adown

adown

a

+ divau ⋅ J ( − z; aup,1)

where J( ) is the CDF of the Gamma distribution.

adown − aup a − adown

)

(

UIG =

G ( a, − z ) =

G ( a ) 1 − J ( − z; a, b =

upper incomplete gamma function =

1) , then

A (θ )

A

=

−1

A B

=

B D

−1

where

{

(

)

1

a

2

2a

× − ( GHG 2 ) ⋅ ( − z ) + 2a ( − z ) ⋅ −UIG ⋅ GHG 3 + aG ( a ) ⋅ GHG 2 ⋅ Log ( − z ) − digamma ( a )

2

a UIG

4

(

)(

}

)

2

+ a 4G ( a ) − G ( a ) − UIG ⋅ Log ( − z ) − digamma ( a ) + UIG ⋅ trigamma ( a )

=

B

{

(

(

1

2a

a

× t − b ⋅ GHG 2 ⋅ ( − z ) − a 2 t bUIG 2 + G ( a )( − z ) Log ( − z ) − digamma ( a )

2

a bUIG

2

) )}

−b

−2 b

a t ( − z ) (1 − a − z ) t ( − z )

+

− 2

D=

b2

b 2UIG

b UIG 2

a

2a

And now all terms use functions that are readily calculable using any computer and statistical and/or

programming language. Note again that due to the use of η, this is an analytical approximation to the Fisher

information for the Truncated LogGamma distribution (the first known to this author), but one that is

sufficiently accurate for the purpose of estimating operational risk capital with deviations of, at most, a few

thousand dollars for capital estimates of hundreds of millions, if not billions of dollars. And when compared to

estimation that relies on numeric integration, the speed increases provided by this approximation approach an

order of magnitude for the values used in this study.

**CURRENT DRAFT MANUSCRIPT, October 2013
**

Page 62 of 63

J.D. OPDYKE

APPENDIX E

**TABLE E1: Values of c(sev, n) by Severity by # of Loss Events
**

150

250

500

750

1000

Root

1.00

1.20

1.00

0.30

1.60

1.50

1.55

1.70

1.00

0.70

1.95

1.85

1.55

1.80

1.00

0.85

2.00

2.00

1.55

1.80

1.00

1.00

2.00

2.10

1.75

1.80

0.30

1.00

2.00

2.10

8

8

3

3

10

10

Severity

LogN

TLogN

Logg

TLogg

GPD

TGPD

FIGURE E1:

Values of c(sev, n) by Severity by # of Loss Events

(Linear and Non-Linear Interpolation via (5) with Roots Specified Above for Shaded Ranges)

2.50

2.00

1.50

X

LogN

c

TLogN

Logg

TLogg

1.00

+

GPD

TGPD

0.50

0.00

0

200

400

600

800

1,000

1,200

# Loss Events

APPENDIX F

Available at http:///www.risk.net/statis/about-the-journal-operational-risk and at

http://www.DataMineit.com and from the author upon request (JDOpdyke@DataMineit.com).

**CURRENT DRAFT MANUSCRIPT, October 2013
**

Page 63 of 63

J.D. OPDYKE

TABLE F4a

RCE vs. LDA for Regulatory Capital Estimation Under iid ($m, λ=25)*

Severity

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

Parm2

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

RCap

Mean

MLE

RCap

MLE

Bias

MLE

Bias%

Mean

RCE

RCap

RCE

Bias

RCE

Bias%

RMSE

MLE

RCap

$63

$53

$649

$603

$2,012

$1,893

$76

$76

$670

$643

$2,085

$1,956

$67

$59

$720

$686

$2,275

$2,198

$85

$96

$847

$894

$2,651

$2,743

$4

$6

$72

$83

$263

$305

$9

$20

$177

$251

$566

$787

6.7%

11.5%

11.0%

13.8%

13.1%

16.1%

11.5%

26.5%

26.4%

39.1%

27.1%

40.2%

$63

$54

$658

$614

$2,048

$1,939

$75

$75

$700

$628

$2,123

$1,965

$0

$1

$9

$12

$37

$46

-$1

-$1

$30

-$14

$38

$9

0.5%

1.5%

1.4%

2.0%

1.8%

2.4%

-1.8%

-1.4%

4.5%

-2.2%

1.8%

0.5%

$25

$30

$355

$382

$1,229

$1,329

$52

$88

$665

$1,087

$2,568

$3,033

$85

$100

$444

$448

$766

$818

$124

$130

$495

$510

$801

$867

$97

$108

$513

$497

$906

$930

$193

$174

$794

$635

$1,305

$1,078

$12

$8

$70

$49

$140

$112

$70

$44

$299

$125

$504

$211

13.6%

8.5%

15.7%

10.9%

18.3%

13.7%

56.1%

34.1%

60.4%

24.5%

62.9%

24.3%

$87

$99

$455

$452

$799

$841

$137

$130

$516

$539

$848

$925

$2

$0

$11

$4

$32

$23

$13

$0

$20

$29

$47

$58

2.1%

-0.4%

2.5%

0.8%

4.2%

2.8%

10.8%

-0.1%

4.1%

5.8%

5.9%

6.7%

$149

$121

$391

$403

$643

$636

$141

$140

$452

$451

$698

$717

$233

$212

$640

$697

$1,079

$1,121

$214

$220

$737

$761

$1,149

$1,206

$85

$91

$249

$295

$436

$486

$73

$80

$285

$309

$451

$489

56.9%

75.6%

63.7%

73.2%

67.8%

76.4%

52.0%

56.9%

63.0%

68.6%

64.7%

68.2%

$152

$124

$396

$408

$645

$637

$144

$145

$466

$463

$704

$715

$3

$3

$5

$5

$1

$2

$3

$5

$13

$12

$7

-$2

2.2%

2.7%

1.2%

1.3%

0.2%

0.3%

2.2%

3.3%

3.0%

2.7%

0.9%

-0.2%

*NOTE: #simulations = 1,000; λ = 25 for 10 years so n ~ 250; α=0.999

RMSE

RMSE

RCE

RCap

RCap RCE/MLE

StdDev

MLE

RCap

StdDev

StdDev

RCE

RCap

RCap RCE/MLE

$23

$26

$313

$328

$1,063

$1,121

$41

$50

$469

$536

$1,771

$1,694

91.8%

87.7%

88.1%

86.0%

86.5%

84.3%

79.4%

56.9%

70.5%

49.3%

69.0%

55.9%

$25

$29

$348

$373

$1,200

$1,294

$51

$86

$641

$1,057

$2,504

$2,929

$23

$26

$313

$328

$1,063

$1,120

$41

$50

$468

$536

$1,771

$1,694

93.1%

89.6%

89.9%

88.0%

88.5%

86.6%

80.5%

58.4%

73.0%

50.7%

70.7%

57.9%

$101

$117

$1,390

$1,481

$4,778

$5,125

$179

$254

$2,288

$3,108

$8,801

$10,400

$62

$56

$355

$296

$647

$589

$273

$173

$1,103

$544

$1,938

$927

$53

$50

$301

$260

$543

$510

$181

$93

$554

$397

$916

$709

86.0%

89.0%

84.8%

87.6%

83.9%

86.6%

66.4%

53.9%

50.2%

73.1%

47.3%

76.5%

$61

$56

$348

$292

$632

$578

$264

$167

$1,062

$529

$1,871

$902

$53

$50

$301

$260

$542

$510

$181

$93

$554

$396

$915

$707

87.5%

90.0%

86.5%

88.8%

85.8%

88.1%

68.5%

55.8%

52.1%

74.9%

48.9%

78.3%

$295

$311

$870

$1,019

$1,535

$1,698

$297

$315

$1,062

$1,174

$1,668

$2,009

$167

$156

$466

$513

$792

$828

$170

$179

$576

$603

$888

$991

56.7%

50.3%

53.6%

50.3%

51.6%

48.8%

57.4%

56.8%

54.3%

51.4%

53.2%

49.3%

$282

$297

$834

$976

$1,472

$1,627

$288

$305

$1,023

$1,132

$1,606

$1,948

$167

$156

$466

$513

$792

$828

$170

$179

$576

$603

$888

$991

59.2%

52.6%

55.9%

52.6%

53.8%

50.9%

59.2%

58.7%

56.3%

53.3%

55.3%

50.9%

PAGE 63 of 78

95%CIs

MLE

RCap

95%CIs

95%CIs

RCE

RCap

RCap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

RCap

IQR

IQR

RCE

RCap

RCap RCE/MLE

Skew

MLE

RCap

Skew

RCE

RCap

Kurtosis

MLE

RCap

Kurtosis

RCE

RCap

$93

$104

$1,248

$1,302

$4,223

$4,430

$146

$173

$1,755

$1,851

$6,308

$6,458

92.7%

89.4%

89.8%

87.9%

88.4%

86.4%

81.6%

68.2%

76.7%

59.6%

71.7%

62.1%

0.373

0.494

0.483

0.543

0.528

0.589

0.598

0.899

0.757

1.183

0.945

1.068

0.368

0.487

0.476

0.534

0.519

0.578

0.547

0.673

0.670

0.853

0.834

0.862

$30

$33

$399

$414

$1,345

$1,401

$48

$68

$576

$659

$1,781

$2,150

$29

$30

$366

$372

$1,215

$1,240

$41

$50

$460

$470

$1,407

$1,469

94.5%

91.4%

91.7%

89.9%

90.4%

88.5%

86.3%

73.8%

79.7%

71.3%

79.0%

68.3%

1.11

1.48

1.44

1.64

1.59

1.79

2.97

4.89

3.41

5.39

4.20

3.83

1.09

1.44

1.41

1.59

1.55

1.73

2.52

2.49

2.44

3.19

3.56

2.63

1.95

3.58

3.41

4.43

4.15

5.33

17.44

41.21

24.05

43.88

27.45

21.70

1.86

3.36

3.20

4.12

3.87

4.90

12.57

10.26

10.90

17.16

20.10

9.88

$217

$210

$1,241

$1,032

$2,277

$2,043

$830

$573

$3,610

$1,894

$6,376

$3,235

$191

$190

$1,069

$920

$1,909

$1,807

$497

$347

$1,957

$1,527

$2,809

$2,517

88.0%

90.2%

86.2%

89.1%

83.8%

88.5%

59.9%

60.5%

54.2%

80.6%

44.0%

77.8%

0.628

0.517

0.678

0.589

0.697

0.622

1.365

0.964

1.337

0.834

1.434

0.838

0.612

0.507

0.662

0.575

0.679

0.606

1.317

0.721

1.074

0.736

1.079

0.764

$63

$60

$356

$286

$654

$571

$151

$128

$610

$495

$979

$771

$56

$55

$308

$258

$576

$508

$100

$91

$385

$411

$636

$645

88.9%

90.9%

86.7%

90.3%

88.1%

88.9%

66.6%

70.9%

63.2%

83.1%

65.0%

83.7%

2.67

1.80

2.28

2.65

2.60

2.74

5.49

3.69

4.16

3.73

5.63

3.04

2.57

1.73

2.21

2.56

2.49

2.63

6.34

2.53

4.04

2.52

5.09

2.61

13.66

6.34

8.72

12.36

13.53

13.55

46.55

20.94

23.92

29.80

49.92

15.19

12.74

5.70

8.19

11.55

12.38

12.52

62.21

10.23

24.12

12.36

41.76

11.16

$973

$971

$2,753

$3,139

$4,845

$5,131

$806

$992

$3,309

$3,362

$5,192

$5,307

$579

$529

$1,555

$1,750

$2,715

$2,781

$504

$591

$1,935

$1,889

$2,946

$2,972

59.5%

54.4%

56.5%

55.8%

56.0%

54.2%

62.5%

59.5%

58.5%

56.2%

56.7%

56.0%

1.210

1.399

1.302

1.399

1.364

1.451

1.341

1.383

1.387

1.489

1.397

1.615

1.099

1.260

1.177

1.258

1.228

1.300

1.181

1.233

1.237

1.302

1.261

1.386

$190

$182

$547

$594

$931

$964

$178

$177

$631

$646

$955

$1,023

$123

$104

$329

$346

$543

$539

$118

$113

$396

$392

$580

$613

64.8%

57.3%

60.2%

58.2%

58.3%

55.9%

65.9%

64.0%

62.8%

60.7%

60.7%

60.0%

3.67

4.31

4.04

4.41

4.37

4.72

7.53

5.99

4.61

5.34

4.33

7.57

3.39

3.93

3.69

4.01

3.96

4.29

6.40

5.55

4.11

4.52

3.92

6.14

20.04

28.14

24.67

29.64

29.24

34.30

102.72

57.29

31.26

43.26

26.32

98.27

17.32

24.03

21.04

25.31

24.68

29.47

77.40

51.15

25.42

31.44

21.45

67.33

TABLE F4b

RCE vs. LDA for Economic Capital Estimation Under iid ($m, λ=25)*

Severity

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

Parm2

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

ECap

Mean

MLE

ECap

MLE

Bias

MLE

Bias%

Mean

RCE

ECap

RCE

Bias

RCE

Bias%

RMSE

MLE

ECap

$107

$107

$1,286

$1,293

$4,230

$4,303

$126

$133

$1,267

$1,297

$4,208

$4,145

$115

$121

$1,449

$1,498

$4,864

$5,097

$144

$179

$1,678

$1,966

$5,639

$6,279

$8

$14

$163

$205

$634

$794

$18

$46

$411

$669

$1,431

$2,134

7.8%

13.2%

12.7%

15.8%

15.0%

18.5%

14.7%

35.0%

32.4%

51.6%

34.0%

51.5%

$108

$109

$1,316

$1,333

$4,352

$4,461

$124

$131

$1,338

$1,264

$4,337

$4,177

$1

$3

$30

$40

$123

$158

-$2

-$2

$71

-$33

$129

$32

1.1%

2.5%

2.4%

3.1%

2.9%

3.7%

-1.3%

-1.5%

5.6%

-2.5%

3.1%

0.8%

$47

$66

$769

$898

$2,828

$3,321

$101

$202

$1,521

$2,910

$6,319

$8,119

$192

$203

$1,064

$960

$1,877

$1,794

$271

$261

$1,164

$1,086

$1,928

$1,892

$225

$225

$1,272

$1,090

$2,300

$2,097

$496

$382

$2,152

$1,437

$3,618

$2,493

$33

$22

$208

$130

$423

$302

$225

$120

$988

$350

$1,689

$601

17.0%

10.7%

19.5%

13.5%

22.5%

16.8%

83.1%

46.1%

84.9%

32.2%

87.6%

31.8%

$199

$204

$1,105

$978

$1,986

$1,869

$297

$247

$1,099

$1,158

$1,855

$2,050

$7

$1

$42

$18

$109

$74

$27

-$15

-$65

$72

-$74

$158

3.4%

0.4%

3.9%

1.8%

5.8%

4.1%

9.9%

-5.6%

-5.6%

6.6%

-3.8%

8.4%

$382

$375

$1,106

$1,251

$1,938

$2,076

$351

$361

$1,267

$1,334

$2,088

$2,227

$696

$785

$2,123

$2,576

$3,835

$4,375

$617

$660

$2,432

$2,672

$4,048

$4,474

$313

$410

$1,016

$1,325

$1,898

$2,299

$266

$299

$1,166

$1,338

$1,960

$2,246

81.9%

109.2%

91.9%

105.9%

97.9%

110.7%

75.7%

82.9%

92.0%

100.4%

93.9%

100.8%

$396

$390

$1,130

$1,279

$1,955

$2,095

$365

$379

$1,327

$1,389

$2,129

$2,246

$13

$14

$24

$28

$17

$19

$13

$18

$61

$55

$41

$19

3.5%

3.8%

2.2%

2.2%

0.9%

0.9%

3.8%

5.0%

4.8%

4.1%

2.0%

0.8%

*NOTE: #simulations = 1,000; λ = 25 for 10 years so n ~ 250; α=0.9997

RMSE

RMSE

RCE

ECap

ECap RCE/MLE

StdDev

MLE

ECap

StdDev

StdDev

RCE

ECap

ECap RCE/MLE

$43

$57

$673

$764

$2,425

$2,769

$77

$97

$1,003

$1,192

$4,072

$3,972

91.3%

87.0%

87.4%

85.2%

85.8%

83.4%

76.1%

48.0%

65.9%

41.0%

64.4%

48.9%

$46

$64

$752

$874

$2,756

$3,224

$99

$197

$1,464

$2,832

$6,154

$7,833

$43

$57

$672

$763

$2,422

$2,765

$77

$97

$1,000

$1,192

$4,070

$3,972

92.7%

89.0%

89.4%

87.4%

87.9%

85.8%

77.4%

49.4%

68.3%

42.1%

66.1%

50.7%

$186

$255

$2,998

$3,465

$10,945

$12,725

$346

$537

$5,074

$7,535

$20,931

$26,918

$163

$131

$984

$734

$1,842

$1,500

$903

$458

$3,620

$1,453

$6,604

$2,499

$137

$115

$814

$631

$1,507

$1,273

$530

$191

$1,370

$941

$2,269

$1,764

84.1%

87.5%

82.7%

86.0%

81.8%

84.9%

58.6%

41.6%

37.8%

64.8%

34.4%

70.6%

$159

$129

$962

$722

$1,793

$1,470

$874

$442

$3,483

$1,410

$6,384

$2,425

$137

$115

$813

$631

$1,503

$1,271

$529

$190

$1,368

$938

$2,267

$1,757

85.7%

88.7%

84.5%

87.3%

83.8%

86.5%

60.5%

42.9%

39.3%

66.5%

35.5%

72.4%

$1,069

$1,398

$3,514

$4,585

$6,657

$8,085

$1,109

$1,193

$4,337

$5,165

$7,203

$9,606

$521

$588

$1,594

$1,930

$2,882

$3,275

$543

$579

$1,988

$2,203

$3,235

$3,873

48.7%

42.1%

45.4%

42.1%

43.3%

40.5%

48.9%

48.5%

45.9%

42.6%

44.9%

40.3%

$1,022

$1,336

$3,363

$4,390

$6,381

$7,751

$1,077

$1,155

$4,177

$4,989

$6,931

$9,339

$521

$588

$1,594

$1,930

$2,882

$3,275

$543

$578

$1,988

$2,202

$3,235

$3,873

50.9%

44.0%

47.4%

44.0%

45.2%

42.2%

50.4%

50.1%

47.6%

44.1%

46.7%

41.5%

PAGE 64 of 78

95%CIs

MLE

ECap

95%CIs

95%CIs

RCE

ECap

ECap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

ECap

IQR

IQR

RCE

ECap

ECap RCE/MLE

Skew

MLE

ECap

Skew

RCE

ECap

Kurtosis

MLE

ECap

Kurtosis

RCE

ECap

$172

$227

$2,675

$3,024

$9,609

$10,912

$266

$335

$3,663

$4,089

$14,366

$15,066

92.3%

88.9%

89.2%

87.3%

87.8%

85.8%

76.9%

62.3%

72.2%

54.3%

68.6%

56.0%

0.402

0.531

0.519

0.583

0.567

0.632

0.687

1.096

0.873

1.441

1.091

1.247

0.397

0.522

0.511

0.573

0.557

0.620

0.618

0.741

0.747

0.943

0.938

0.951

$56

$72

$854

$958

$3,050

$3,434

$88

$135

$1,211

$1,481

$3,951

$5,076

$51

$64

$764

$839

$2,687

$2,958

$73

$96

$924

$985

$2,976

$3,309

92.3%

89.1%

89.4%

87.6%

88.1%

86.1%

83.7%

70.8%

76.3%

66.5%

75.3%

65.2%

1.20

1.61

1.57

1.78

1.73

1.95

3.49

6.19

4.33

6.55

4.86

4.54

1.18

1.57

1.53

1.73

1.68

1.89

2.89

2.51

2.81

3.47

3.98

2.87

2.35

4.34

4.12

5.39

5.04

6.52

23.76

63.11

38.66

61.51

36.00

29.89

2.25

4.05

3.85

4.98

4.67

5.95

16.25

9.95

14.78

20.09

24.79

11.67

$557

$492

$3,424

$2,505

$6,365

$5,113

$2,359

$1,462

$11,139

$4,792

$20,825

$8,627

$478

$436

$2,849

$2,207

$5,300

$4,437

$1,229

$707

$4,881

$3,638

$6,298

$6,151

85.9%

88.6%

83.2%

88.1%

83.3%

86.8%

52.1%

48.4%

43.8%

75.9%

30.2%

71.3%

0.708

0.575

0.757

0.663

0.779

0.701

1.764

1.159

1.618

0.981

1.765

0.973

0.687

0.562

0.736

0.645

0.756

0.680

1.778

0.771

1.245

0.810

1.223

0.857

$155

$136

$936

$677

$1,762

$1,360

$385

$292

$1,629

$1,190

$2,710

$1,861

$137

$121

$800

$594

$1,502

$1,203

$217

$184

$782

$935

$1,406

$1,517

88.5%

88.9%

85.4%

87.7%

85.2%

88.4%

56.4%

62.8%

48.0%

78.5%

51.9%

81.5%

3.06

2.04

2.56

3.03

3.01

3.15

7.20

4.36

4.86

4.79

6.84

3.59

2.94

1.95

2.47

2.92

2.87

3.01

8.71

2.80

4.88

2.61

6.34

2.90

17.56

8.22

10.93

15.81

18.19

17.56

78.04

28.31

31.98

47.53

72.80

21.03

16.31

7.33

10.19

14.67

16.53

16.09

112.48

13.47

34.33

12.40

61.09

13.68

$3,387

$4,041

$10,348

$13,301

$19,608

$23,030

$2,654

$3,435

$12,419

$13,302

$20,816

$22,320

$1,746

$1,906

$5,113

$6,281

$9,118

$10,486

$1,446

$1,776

$6,337

$6,344

$10,223

$10,320

51.5%

47.2%

49.4%

47.2%

46.5%

45.5%

54.5%

51.7%

51.0%

47.7%

49.1%

46.2%

1.469

1.701

1.585

1.704

1.664

1.772

1.745

1.749

1.717

1.867

1.712

2.088

1.315

1.509

1.410

1.509

1.475

1.563

1.489

1.526

1.498

1.586

1.519

1.724

$577

$657

$1,818

$2,182

$3,298

$3,686

$515

$525

$2,065

$2,224

$3,384

$3,650

$332

$330

$960

$1,099

$1,681

$1,797

$310

$307

$1,144

$1,182

$1,765

$1,936

57.5%

50.2%

52.8%

50.4%

51.0%

48.8%

60.2%

58.6%

55.4%

53.2%

52.2%

53.1%

4.38

5.16

4.87

5.30

5.28

5.68

9.98

7.36

5.54

6.58

5.13

9.86

3.97

4.69

4.41

4.81

4.76

5.15

8.34

6.79

4.89

5.48

4.60

7.85

27.86

39.16

34.76

41.36

41.18

47.71

164.33

81.65

43.68

63.72

36.26

155.89

23.37

33.55

29.38

35.48

34.90

41.14

121.42

72.55

35.05

45.31

28.88

104.71

TABLE F5a

RCE vs. LDA for Regulatory Capital Estimation Under iid ($m, λ=15)*

Severity

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

Parm2

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

RCap

Mean

MLE

RCap

MLE

Bias

MLE

Bias%

Mean

RCE

RCap

RCE

Bias

RCE

Bias%

RMSE

MLE

RCap

$48

$38

$473

$426

$1,434

$1,306

$59

$57

$497

$465

$1,510

$1,389

$51

$43

$527

$489

$1,633

$1,540

$70

$87

$710

$764

$2,263

$2,652

$3

$5

$54

$63

$199

$233

$11

$30

$213

$299

$753

$1,263

6.0%

11.9%

11.3%

14.9%

13.9%

17.9%

18.9%

52.0%

42.9%

64.2%

49.9%

90.9%

$47

$38

$471

$428

$1,438

$1,324

$59

$56

$535

$457

$1,677

$1,507

-$1

$0

-$2

$2

$4

$17

$0

-$1

$39

-$8

$167

$118

-1.6%

-0.2%

-0.4%

0.5%

0.3%

1.3%

0.3%

-2.1%

7.8%

-1.8%

11.1%

8.5%

$24

$27

$322

$337

$1,093

$1,154

$55

$173

$1,072

$1,116

$2,740

$5,725

$59

$72

$301

$317

$515

$575

$87

$94

$339

$362

$543

$610

$73

$85

$380

$369

$659

$685

$232

$162

$712

$526

$1,097

$858

$13

$13

$79

$52

$144

$111

$145

$68

$373

$164

$554

$248

22.3%

17.8%

26.4%

16.3%

27.9%

19.3%

166.7%

72.7%

110.2%

45.3%

102.1%

40.7%

$60

$73

$306

$312

$523

$574

$150

$108

$408

$380

$586

$668

$1

$1

$5

-$5

$8

$0

$63

$14

$70

$18

$43

$58

1.2%

1.3%

1.7%

-1.6%

1.6%

-0.1%

72.8%

15.4%

20.6%

5.0%

8.0%

9.5%

$99

$74

$250

$248

$401

$383

$95

$93

$290

$283

$436

$441

$178

$155

$477

$509

$761

$802

$172

$159

$583

$549

$940

$906

$79

$81

$227

$262

$360

$419

$77

$66

$293

$266

$505

$465

80.3%

108.8%

91.1%

105.7%

90.0%

109.5%

81.6%

71.3%

101.2%

93.8%

115.9%

105.6%

$101

$76

$253

$251

$386

$381

$100

$92

$315

$283

$483

$446

$2

$2

$4

$3

-$14

-$2

$5

-$1

$26

-$1

$47

$5

2.4%

2.6%

1.4%

1.4%

-3.6%

-0.6%

5.4%

-0.8%

8.8%

-0.2%

10.8%

1.2%

*NOTE: #simulations = 1,000; λ = 15 for 10 years so n ~ 150; α=0.999

RMSE

RMSE

RCE

RCap

RCap RCE/MLE

StdDev

MLE

RCap

StdDev

StdDev

RCE

RCap

RCap RCE/MLE

$22

$23

$279

$285

$929

$952

$39

$44

$537

$434

$1,676

$1,743

90.9%

86.3%

86.8%

84.4%

85.0%

82.5%

71.4%

25.4%

50.1%

38.9%

61.2%

30.4%

$24

$27

$318

$331

$1,075

$1,130

$54

$171

$1,050

$1,075

$2,635

$5,584

$22

$23

$279

$285

$929

$952

$39

$44

$535

$434

$1,668

$1,739

91.5%

87.6%

88.0%

85.9%

86.4%

84.2%

72.9%

25.8%

51.0%

40.4%

63.3%

31.1%

$92

$101

$1,216

$1,262

$4,097

$4,283

$185

$350

$2,468

$3,540

$9,381

$12,350

$60

$61

$344

$262

$607

$522

$1,121

$398

$1,547

$704

$2,098

$962

$46

$49

$253

$209

$440

$411

$372

$251

$825

$335

$999

$576

76.6%

80.6%

73.4%

79.9%

72.6%

78.6%

33.2%

62.9%

53.3%

47.5%

47.6%

59.9%

$58

$60

$335

$257

$589

$511

$1,112

$392

$1,502

$685

$2,023

$929

$46

$49

$253

$209

$440

$411

$366

$250

$822

$334

$998

$573

78.5%

82.4%

75.4%

81.5%

74.7%

80.5%

33.0%

63.8%

54.7%

48.8%

49.3%

61.7%

$257

$255

$725

$832

$1,245

$1,348

$323

$250

$964

$1,053

$1,567

$2,059

$123

$103

$320

$339

$528

$527

$157

$122

$427

$438

$657

$801

47.6%

40.6%

44.2%

40.7%

42.4%

39.1%

48.6%

48.8%

44.3%

41.6%

41.9%

38.9%

$245

$242

$688

$790

$1,192

$1,281

$313

$241

$918

$1,019

$1,483

$2,005

$123

$103

$320

$339

$527

$527

$157

$122

$426

$438

$655

$801

50.0%

42.8%

46.5%

42.9%

44.2%

41.2%

50.0%

50.6%

46.4%

43.0%

44.2%

39.9%

PAGE 65 of 78

95%CIs

MLE

RCap

95%CIs

95%CIs

RCE

RCap

RCap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

RCap

IQR

IQR

RCE

RCap

RCap RCE/MLE

Skew

MLE

RCap

Skew

RCE

RCap

Kurtosis

MLE

RCap

Kurtosis

RCE

RCap

$85

$90

$1,078

$1,093

$3,573

$3,641

$143

$169

$1,661

$1,699

$5,847

$5,777

91.8%

88.3%

88.7%

86.6%

87.2%

85.0%

77.5%

48.3%

67.3%

48.0%

62.3%

46.8%

0.468

0.617

0.603

0.678

0.658

0.734

0.771

1.955

1.479

1.408

1.164

2.105

0.461

0.606

0.593

0.665

0.646

0.719

0.667

0.782

1.000

0.950

0.994

1.154

$29

$30

$358

$359

$1,177

$1,184

$49

$64

$505

$611

$1,754

$1,924

$26

$26

$314

$308

$1,015

$997

$40

$45

$396

$386

$1,331

$1,239

91.0%

87.4%

87.7%

85.8%

86.3%

84.3%

81.0%

70.0%

78.5%

63.2%

75.9%

64.4%

1.20

1.59

1.55

1.75

1.70

1.90

3.63

17.77

9.59

4.75

3.77

10.36

1.19

1.57

1.53

1.72

1.67

1.86

2.65

2.05

4.76

3.00

3.38

3.82

1.86

3.44

3.27

4.22

3.96

5.03

24.46

433.88

133.49

32.25

18.98

167.66

1.81

3.33

3.17

4.08

3.83

4.84

13.60

5.66

36.93

14.29

16.96

21.93

$217

$210

$1,142

$981

$2,135

$1,806

$1,156

$726

$3,703

$2,027

$6,613

$3,157

$173

$174

$863

$796

$1,555

$1,463

$928

$399

$1,829

$1,189

$2,989

$2,027

79.9%

83.1%

75.6%

81.1%

72.8%

81.0%

80.3%

55.0%

49.4%

58.6%

45.2%

64.2%

0.802

0.707

0.881

0.697

0.894

0.745

4.789

2.422

2.109

1.302

1.845

1.083

0.761

0.677

0.826

0.670

0.841

0.716

2.436

2.311

2.014

0.879

1.703

0.858

$52

$59

$277

$270

$490

$523

$145

$110

$522

$417

$802

$725

$42

$50

$221

$224

$384

$431

$98

$71

$282

$304

$415

$577

81.3%

84.4%

79.8%

82.9%

78.3%

82.3%

67.3%

64.7%

54.0%

72.8%

51.7%

79.6%

2.86

2.69

3.39

2.06

3.04

2.34

24.42

19.94

7.01

5.55

5.41

3.67

2.68

2.57

3.07

2.00

2.86

2.23

8.44

22.43

7.66

3.05

5.80

2.39

12.85

12.04

18.59

5.94

14.03

9.29

688.38

514.19

63.01

48.31

39.73

22.49

11.31

11.24

15.01

5.66

12.53

8.39

95.43

616.69

78.35

16.46

47.30

9.30

$868

$837

$2,444

$2,694

$4,185

$4,375

$909

$748

$3,225

$2,953

$5,210

$4,830

$450

$368

$1,176

$1,226

$1,879

$1,901

$451

$393

$1,570

$1,375

$2,361

$2,241

51.8%

44.0%

48.1%

45.5%

44.9%

43.5%

49.6%

52.6%

48.7%

46.6%

45.3%

46.4%

1.378

1.558

1.443

1.551

1.566

1.596

1.824

1.513

1.574

1.857

1.578

2.213

1.215

1.356

1.265

1.350

1.366

1.385

1.572

1.322

1.351

1.552

1.358

1.795

$165

$139

$443

$458

$703

$722

$148

$149

$527

$467

$912

$710

$94

$70

$237

$233

$365

$355

$85

$84

$283

$250

$480

$365

57.0%

50.5%

53.6%

50.9%

51.9%

49.2%

57.5%

56.6%

53.7%

53.5%

52.6%

51.5%

3.30

3.68

3.47

3.68

3.70

3.90

6.48

5.16

4.74

7.01

4.18

7.64

2.89

3.13

2.97

3.13

3.14

3.28

5.97

4.59

4.00

5.73

3.60

6.32

14.01

17.78

15.94

18.11

18.55

20.94

57.49

41.59

31.27

81.71

22.83

76.96

10.60

12.60

11.37

12.67

12.95

14.37

50.13

34.13

22.49

56.83

17.62

54.31

TABLE F5b

RCE vs. LDA for Economic Capital Estimation Under iid ($m, λ=15)*

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

ECap

Mean

MLE

ECap

MLE

Bias

MLE

Bias%

Mean

RCE

ECap

RCE

Bias

RCE

Bias%

RMSE

MLE

ECap

$84

$79

$958

$935

$3,082

$3,041

$99

$103

$959

$959

$3,113

$3,009

$90

$90

$1,087

$1,099

$3,590

$3,682

$124

$182

$1,509

$1,801

$5,093

$6,838

$6

$11

$129

$165

$508

$641

$24

$79

$549

$842

$1,980

$3,829

7.3%

14.2%

13.5%

17.6%

16.5%

21.1%

24.6%

76.8%

57.2%

87.8%

63.6%

127.3%

$83

$80

$968

$955

$3,141

$3,140

$101

$101

$1,062

$943

$3,551

$3,346

-$1

$1

$10

$21

$58

$99

$2

-$2

$103

-$16

$438

$338

-0.8%

1.2%

1.0%

2.2%

1.9%

3.2%

1.7%

-2.0%

10.7%

-1.7%

14.1%

11.2%

$46

$61

$717

$818

$2,591

$2,977

$115

$543

$2,960

$3,173

$7,129

$18,723

$136

$149

$732

$691

$1,281

$1,280

$193

$192

$807

$783

$1,325

$1,352

$174

$182

$976

$833

$1,733

$1,589

$828

$404

$2,175

$1,278

$3,342

$2,095

$38

$33

$244

$142

$452

$309

$635

$212

$1,368

$495

$2,017

$744

28.3%

22.2%

33.3%

20.5%

35.2%

24.2%

329.3%

110.5%

169.5%

63.3%

152.3%

55.0%

$139

$153

$754

$686

$1,319

$1,294

$416

$220

$985

$789

$1,357

$1,458

$4

2.6%

$4

2.6%

$22

3.0%

-$5

-0.7%

$38

3.0%

$14

1.1%

$223 115.7%

$29 14.9%

$178 22.0%

$6

0.8%

$32

2.4%

$106

7.8%

$254

$231

$707

$770

$1,207

$1,252

$236

$240

$813

$837

$1,304

$1,371

$558

$608

$1,668

$1,992

$2,869

$3,315

$538

$499

$2,071

$2,065

$3,609

$3,681

$304

$377

$961

$1,222

$1,661

$2,063

$302

$260

$1,258

$1,228

$2,304

$2,310

119.9%

163.4%

135.9%

158.8%

137.6%

164.9%

127.8%

108.5%

154.8%

146.7%

176.7%

168.6%

$263

$238

$720

$782

$1,167

$1,241

$257

$239

$910

$846

$1,483

$1,416

$9

$7

$13

$12

-$41

-$11

$21

$0

$97

$9

$179

$45

*NOTE: #simulations = 1,000; λ = 15 for 10 years so n ~ 150; α=0.9997

3.4%

3.1%

1.9%

1.5%

-3.4%

-0.9%

9.0%

0.0%

12.0%

1.0%

13.7%

3.3%

RMSE

RMSE

RCE

ECap

ECap RCE/MLE

StdDev

MLE

ECap

StdDev

StdDev

RCE

ECap

ECap RCE/MLE

$41

$52

$617

$683

$2,181

$2,428

$76

$88

$1,225

$994

$3,969

$4,465

90.4%

85.6%

86.1%

83.5%

84.2%

81.6%

66.4%

16.2%

41.4%

31.3%

55.7%

23.8%

$45

$60

$705

$801

$2,541

$2,907

$113

$537

$2,908

$3,059

$6,848

$18,327

$41

$52

$617

$683

$2,180

$2,426

$76

$88

$1,220

$994

$3,945

$4,453

91.2%

87.1%

87.5%

85.2%

85.8%

83.5%

67.9%

16.3%

42.0%

32.5%

57.6%

24.3%

$179

$235

$2,772

$3,140

$9,968

$11,363

$362

$805

$5,611

$9,115

$23,464

$33,900

$164

$149

$1,016

$663

$1,811

$1,357

$7,242

$1,465

$6,125

$2,135

$7,938

$2,805

$120

$116

$705

$510

$1,244

$1,027

$1,460

$795

$2,780

$759

$2,981

$1,352

73.1%

78.0%

69.4%

77.0%

68.7%

75.7%

20.2%

54.3%

45.4%

35.6%

37.6%

48.2%

$159

$145

$987

$647

$1,753

$1,321

$7,214

$1,450

$5,970

$2,077

$7,677

$2,704

$120

$116

$705

$510

$1,244

$1,027

$1,443

$795

$2,774

$759

$2,981

$1,348

75.1%

79.9%

71.4%

78.9%

70.9%

77.7%

20.0%

54.8%

46.5%

36.5%

38.8%

49.8%

$976

$1,199

$3,053

$3,909

$5,633

$6,693

$1,295

$985

$4,252

$5,096

$7,331

$10,884

$378

$380

$1,075

$1,243

$1,874

$2,024

$508

$390

$1,482

$1,638

$2,401

$3,185

38.7%

31.7%

35.2%

31.8%

33.3%

30.2%

39.3%

39.6%

34.9%

32.1%

32.7%

29.3%

$928

$1,138

$2,898

$3,713

$5,382

$6,367

$1,259

$950

$4,061

$4,945

$6,959

$10,636

$378

$380

$1,074

$1,243

$1,873

$2,024

$508

$390

$1,479

$1,638

$2,394

$3,184

40.7%

33.4%

37.1%

33.5%

34.8%

31.8%

40.3%

41.0%

36.4%

33.1%

34.4%

29.9%

PAGE 66 of 78

95%CIs

MLE

ECap

95%CIs

95%CIs

RCE

ECap

ECap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

ECap

IQR

IQR

RCE

ECap

ECap RCE/MLE

Skew

MLE

ECap

Skew

RCE

ECap

Kurtosis

MLE

ECap

Kurtosis

RCE

ECap

$162

$202

$2,399

$2,642

$8,451

$9,348

$279

$332

$3,713

$3,895

$13,431

$13,664

90.5%

86.1%

86.6%

84.1%

84.8%

82.3%

77.1%

41.2%

66.2%

42.7%

57.2%

40.3%

0.504

0.663

0.649

0.729

0.708

0.789

0.911

2.951

1.928

1.699

1.345

2.680

0.497

0.651

0.637

0.714

0.694

0.773

0.758

0.869

1.149

1.054

1.111

1.331

$54

$66

$781

$846

$2,718

$2,955

$92

$128

$1,075

$1,407

$3,941

$4,582

$49

$57

$685

$723

$2,339

$2,474

$73

$85

$801

$824

$2,864

$2,803

90.9%

87.3%

87.7%

85.5%

86.1%

83.7%

79.3%

66.6%

74.5%

58.5%

72.7%

61.2%

1.29

1.71

1.67

1.88

1.82

2.04

4.51

22.07

12.09

5.58

4.16

12.27

1.28

1.67

1.64

1.84

1.79

1.99

3.13

2.27

5.47

3.37

3.66

4.65

2.16

3.94

3.75

4.83

4.54

5.74

35.70

592.72

200.76

42.63

22.33

220.68

2.10

3.80

3.62

4.64

4.36

5.49

18.58

7.09

46.47

18.43

19.17

32.36

$581

$502

$3,274

$2,401

$6,125

$4,567

$3,903

$2,039

$13,076

$5,585

$22,129

$8,667

$438

$406

$2,368

$1,942

$4,363

$3,618

$2,804

$897

$4,519

$2,599

$7,350

$4,701

75.4%

80.9%

72.3%

80.9%

71.2%

79.2%

71.8%

44.0%

34.6%

46.5%

33.2%

54.2%

0.915

0.798

1.011

0.777

1.012

0.831

8.715

3.588

2.745

1.625

2.297

1.291

0.859

0.760

0.934

0.744

0.943

0.794

3.470

3.605

2.816

0.962

2.197

0.925

$129

$134

$747

$633

$1,349

$1,279

$382

$257

$1,423

$1,015

$2,278

$1,797

$102

$112

$567

$517

$1,016

$1,020

$213

$143

$632

$642

$905

$1,288

78.7%

83.7%

75.9%

81.7%

75.3%

79.7%

55.7%

55.8%

44.5%

63.2%

39.7%

71.7%

3.31

3.02

3.99

2.26

3.36

2.60

28.55

23.68

8.45

6.84

6.68

4.65

3.06

2.87

3.51

2.18

3.14

2.47

11.01

26.41

10.62

3.75

7.58

2.62

17.04

14.80

25.88

7.08

16.76

11.36

865.50

659.71

89.14

70.02

63.01

36.54

14.65

13.64

19.49

6.65

14.89

10.18

159.83

777.87

150.22

26.23

82.42

11.51

$3,208

$3,745

$9,646

$12,270

$17,924

$20,958

$3,192

$2,696

$12,752

$12,708

$22,760

$21,357

$1,351

$1,325

$3,778

$4,393

$6,552

$6,920

$1,326

$1,162

$5,320

$4,708

$8,367

$8,114

42.1%

35.4%

39.2%

35.8%

36.6%

33.0%

41.5%

43.1%

41.7%

37.1%

36.8%

38.0%

1.661

1.871

1.737

1.863

1.876

1.921

2.341

1.902

1.961

2.394

1.928

2.889

1.438

1.598

1.492

1.590

1.606

1.631

1.974

1.627

1.625

1.936

1.614

2.249

$494

$515

$1,479

$1,700

$2,498

$2,784

$443

$452

$1,770

$1,629

$3,330

$2,580

$244

$215

$678

$705

$1,066

$1,120

$216

$218

$818

$727

$1,464

$1,100

49.5%

41.8%

45.8%

41.5%

42.7%

40.2%

48.7%

48.1%

46.2%

44.6%

44.0%

42.6%

3.89

4.35

4.14

4.38

4.44

4.68

7.68

6.53

5.72

9.16

4.93

9.09

3.35

3.64

3.47

3.64

3.68

3.82

7.08

5.83

4.70

7.50

4.22

7.37

19.39

24.85

22.76

25.62

26.65

29.99

77.92

63.93

44.43

132.86

30.61

104.00

14.17

16.90

15.63

17.12

17.79

19.38

67.73

53.24

30.37

94.59

23.44

70.72

TABLE F6a

RCE vs. LDA for Regulatory Capital Estimation Under iid ($m, λ=50)*

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

RCap

Mean

MLE

RCap

MLE

Bias

MLE

Bias%

Mean

RCE

RCap

RCE

Bias

RCE

Bias%

RMSE

MLE

RCap

$90

$81

$984

$952

$3,145

$3,085

$108

$110

$996

$985

$3,195

$3,072

$92

$85

$1,035

$1,014

$3,338

$3,321

$117

$125

$1,120

$1,183

$3,667

$3,599

$3

$4

$51

$62

$194

$236

$9

$15

$124

$197

$472

$527

3.0%

5.4%

5.1%

6.5%

6.2%

7.7%

8.1%

13.9%

12.5%

20.0%

14.8%

17.1%

$89

$81

$987

$958

$3,161

$3,112

$109

$111

$1,014

$1,006

$3,270

$3,061

$0

$0

$3

$6

$16

$27

$1

$1

$18

$21

$75

-$11

-0.2%

0.3%

0.3%

0.6%

0.5%

0.9%

1.0%

1.3%

1.8%

2.1%

2.4%

-0.4%

$25

$31

$370

$408

$1,304

$1,446

$49

$76

$620

$838

$2,201

$2,422

$139

$154

$745

$709

$1,301

$1,310

$199

$200

$823

$805

$1,348

$1,386

$146

$160

$806

$754

$1,425

$1,403

$262

$226

$1,035

$899

$1,664

$1,573

$8

$6

$62

$45

$124

$93

$63

$26

$212

$93

$316

$188

5.6%

3.6%

8.3%

6.3%

9.5%

7.1%

31.7%

13.2%

25.8%

11.6%

23.4%

13.6%

$139

$153

$758

$718

$1,337

$1,333

$204

$204

$860

$827

$1,400

$1,450

$0

-$1

$13

$9

$36

$23

$5

$4

$37

$21

$52

$65

0.0%

-0.8%

1.8%

1.2%

2.7%

1.7%

2.5%

2.0%

4.5%

2.6%

3.9%

4.7%

$260

$234

$719

$779

$1,223

$1,264

$243

$246

$827

$850

$1,323

$1,387

$339

$327

$970

$1,088

$1,681

$1,790

$304

$315

$1,101

$1,140

$1,795

$1,928

$79

$93

$251

$309

$458

$526

$61

$70

$274

$290

$472

$541

30.5%

39.8%

34.8%

39.7%

37.4%

41.6%

25.3%

28.3%

33.1%

34.1%

35.7%

39.0%

$268

$243

$744

$810

$1,265

$1,311

$243

$249

$845

$861

$1,351

$1,428

$8

$10

$25

$31

$41

$48

$0

$3

$18

$11

$28

$41

3.0%

4.1%

3.4%

4.0%

3.4%

3.8%

-0.1%

1.2%

2.2%

1.3%

2.1%

2.9%

*NOTE: #simulations = 1,000; λ = 50 for 10 years so n ~ 500; α=0.999

RMSE

RMSE

RCE

RCap

RCap RCE/MLE

StdDev

MLE

RCap

StdDev

StdDev

RCE

RCap

RCap RCE/MLE

95%CIs

MLE

RCap

95%CIs

95%CIs

RCE

RCap

RCap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

RCap

$24

$29

$347

$377

$1,210

$1,324

$44

$61

$527

$637

$1,834

$1,864

95.7%

93.5%

93.7%

92.5%

92.8%

91.6%

88.3%

80.0%

84.9%

76.0%

83.3%

77.0%

$25

$31

$367

$403

$1,289

$1,427

$49

$75

$608

$815

$2,150

$2,364

$24

$29

$347

$377

$1,210

$1,324

$44

$61

$526

$637

$1,832

$1,864

96.3%

94.4%

94.6%

93.6%

93.8%

92.8%

89.6%

81.6%

86.6%

78.1%

85.2%

78.9%

$97

$118

$1,402

$1,534

$4,914

$5,412

$192

$272

$2,192

$3,008

$8,260

$8,573

$93

$112

$1,327

$1,437

$4,617

$5,027

$175

$224

$1,932

$2,384

$6,980

$6,851

96.0%

94.5%

94.7%

93.7%

94.0%

92.9%

90.7%

82.6%

88.1%

79.3%

84.5%

79.9%

0.272

0.362

0.354

0.397

0.386

0.430

0.416

0.596

0.543

0.689

0.586

0.657

0.270

0.359

0.351

0.394

0.383

0.425

0.399

0.547

0.519

0.633

0.560

0.609

$31

$36

$429

$462

$1,487

$1,612

$54

$74

$615

$799

$2,178

$2,401

$30

$34

$411

$438

$1,414

$1,515

$49

$63

$547

$663

$1,910

$1,984

$64

$58

$382

$318

$710

$611

$310

$155

$901

$510

$1,455

$890

$60

$55

$351

$297

$649

$569

$182

$124

$634

$446

$1,048

$778

93.0%

94.4%

91.7%

93.4%

91.5%

93.1%

58.7%

80.4%

70.3%

87.5%

72.0%

87.4%

$64

$58

$377

$315

$699

$604

$304

$152

$876

$502

$1,421

$870

$60

$55

$350

$297

$648

$569

$182

$124

$633

$446

$1,047

$775

93.7%

94.8%

92.8%

94.3%

92.8%

94.1%

59.9%

81.6%

72.3%

88.9%

73.7%

89.1%

$246

$223

$1,423

$1,188

$2,698

$2,194

$808

$503

$3,051

$1,941

$4,562

$3,272

$233

$213

$1,327

$1,118

$2,517

$2,061

$547

$439

$2,236

$1,745

$3,529

$2,914

94.5%

95.3%

93.2%

94.1%

93.3%

94.0%

67.7%

87.3%

73.3%

89.9%

77.4%

89.1%

0.437

0.363

0.468

0.417

0.490

0.430

1.161

0.674

0.846

0.558

0.854

0.553

0.432

0.360

0.462

0.413

0.485

0.426

0.894

0.610

0.736

0.540

0.748

0.535

$73

$71

$433

$372

$807

$710

$182

$130

$719

$572

$1,238

$973

$304

$339

$939

$1,129

$1,701

$1,917

$249

$282

$1,104

$1,091

$1,800

$2,245

$220

$230

$658

$765

$1,168

$1,275

$183

$205

$771

$750

$1,240

$1,487

72.4%

67.8%

70.1%

67.8%

68.7%

66.5%

73.5%

72.6%

69.8%

68.7%

68.9%

66.2%

$294

$326

$905

$1,086

$1,638

$1,843

$242

$273

$1,069

$1,051

$1,736

$2,179

$220

$230

$658

$765

$1,167

$1,274

$183

$205

$770

$750

$1,240

$1,486

74.9%

70.4%

72.7%

70.4%

71.3%

69.1%

75.9%

74.9%

72.1%

71.3%

71.4%

68.2%

$1,054

$1,154

$3,219

$3,847

$5,647

$6,396

$976

$984

$3,440

$3,764

$6,365

$6,423

$792

$827

$2,368

$2,757

$4,037

$4,424

$741

$745

$2,530

$2,690

$4,514

$4,549

75.2%

71.6%

73.6%

71.6%

71.5%

69.2%

75.9%

75.7%

73.6%

71.5%

70.9%

70.8%

0.866

0.998

0.933

0.998

0.974

1.030

0.794

0.867

0.971

0.922

0.967

1.130

0.822

0.944

0.885

0.944

0.923

0.971

0.755

0.823

0.912

0.870

0.918

1.041

$276

$276

$808

$918

$1,411

$1,530

$224

$244

$868

$915

$1,481

$1,592

PAGE 67 of 78

IQR

IQR

RCE

RCap

RCap RCE/MLE

Skew

MLE

RCap

Skew

RCE

RCap

Kurtosis

MLE

RCap

Kurtosis

RCE

RCap

95.9%

95.5%

95.8%

94.8%

95.1%

94.0%

92.3%

86.0%

88.9%

82.9%

87.7%

82.6%

0.86

1.10

1.07

1.19

1.16

1.28

1.64

2.71

2.06

2.56

2.29

2.46

0.85

1.08

1.06

1.18

1.15

1.26

1.54

2.35

1.97

2.18

2.15

2.18

0.90

1.52

1.46

1.82

1.72

2.10

4.25

14.19

7.57

12.21

9.06

11.43

0.88

1.49

1.43

1.78

1.69

2.06

3.70

10.59

6.98

8.07

8.02

9.04

$68

$68

$406

$349

$754

$674

$136

$116

$590

$507

$1,005

$875

93.1%

95.8%

93.6%

93.8%

93.4%

94.8%

74.8%

88.9%

82.0%

88.7%

81.1%

89.9%

1.65

1.26

1.51

1.29

1.51

1.69

8.04

5.56

3.53

1.56

4.21

2.11

1.63

1.24

1.48

1.28

1.50

1.67

5.32

4.31

2.77

1.48

3.10

1.97

4.61

2.45

3.75

2.55

3.56

6.22

110.67

71.10

20.37

3.36

32.51

9.53

4.47

2.36

3.61

2.50

3.49

6.05

49.66

45.45

12.59

2.96

17.37

8.36

$213

$204

$600

$681

$1,040

$1,119

$177

$189

$647

$672

$1,095

$1,168

77.1%

74.0%

74.2%

74.2%

73.7%

73.1%

79.2%

77.7%

74.5%

73.5%

73.9%

73.3%

2.90

3.33

3.13

3.34

3.30

3.49

2.42

2.92

4.07

3.53

3.31

6.65

2.73

3.10

2.94

3.10

3.08

3.22

2.30

2.77

3.72

3.19

3.13

5.70

12.83

16.90

14.95

16.97

16.65

18.80

8.75

13.13

28.67

25.80

18.39

83.48

11.32

14.51

13.16

14.56

14.48

15.93

7.88

11.89

24.11

21.07

16.56

63.04

TABLE F6b

RCE vs. LDA for Economic Capital Estimation Under iid ($m, λ=50)*

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

ECap

Mean

MLE

ECap

MLE

Bias

MLE

Bias%

Mean

RCE

ECap

RCE

Bias

RCE

Bias%

RMSE

MLE

ECap

$148

$158

$1,898

$1,984

$6,425

$6,803

$173

$187

$1,833

$1,936

$6,271

$6,333

$153

$168

$2,010

$2,133

$6,879

$7,400

$190

$220

$2,110

$2,417

$7,382

$7,672

$5

$10

$112

$149

$454

$596

$17

$33

$278

$481

$1,111

$1,339

3.5%

6.2%

5.9%

7.5%

7.1%

8.8%

10.1%

17.7%

15.2%

24.8%

17.7%

21.1%

$148

$160

$1,912

$2,007

$6,494

$6,906

$176

$191

$1,881

$1,991

$6,471

$6,343

$0

$1

$15

$23

$69

$103

$3

$4

$49

$56

$199

$9

0.1%

0.8%

0.8%

1.2%

1.1%

1.5%

1.7%

2.1%

2.7%

2.9%

3.2%

0.1%

$45

$66

$769

$917

$2,873

$3,444

$91

$155

$1,303

$1,944

$4,923

$5,810

$307

$308

$1,752

$1,491

$3,127

$2,818

$427

$395

$1,900

$1,683

$3,186

$2,965

$328

$322

$1,929

$1,606

$3,489

$3,059

$618

$465

$2,550

$1,935

$4,181

$3,469

$22

$14

$177

$115

$362

$241

$192

$70

$650

$252

$995

$504

7.0%

4.6%

10.1%

7.7%

11.6%

8.6%

45.0%

17.7%

34.2%

15.0%

31.2%

17.0%

$309

$307

$1,799

$1,520

$3,244

$2,888

$427

$406

$1,987

$1,748

$3,333

$3,145

$2

-$1

$47

$29

$118

$70

$1

$12

$87

$65

$147

$180

0.7%

-0.4%

2.7%

2.0%

3.8%

2.5%

0.2%

3.0%

4.6%

3.9%

4.6%

6.1%

$667

$726

$2,031

$2,418

$3,681

$4,124

$603

$629

$2,313

$2,508

$3,953

$4,305

$944

$1,117

$2,992

$3,720

$5,550

$6,457

$812

$874

$3,366

$3,668

$5,875

$6,619

$277

$392

$961

$1,302

$1,869

$2,332

$209

$245

$1,052

$1,161

$1,922

$2,313

41.5%

54.0%

47.3%

53.8%

50.8%

56.5%

34.7%

38.8%

45.5%

46.3%

48.6%

53.7%

$697

$767

$2,132

$2,555

$3,861

$4,346

$606

$644

$2,397

$2,564

$4,088

$4,506

$30

$42

$102

$137

$180

$222

$3

$14

$84

$56

$134

$201

4.5%

5.8%

5.0%

5.6%

4.9%

5.4%

0.6%

2.3%

3.6%

2.2%

3.4%

4.7%

*NOTE: #simulations = 1,000; λ = 50 for 10 years so n ~ 500; α=0.9997

RMSE

RMSE

RCE

ECap

ECap RCE/MLE

StdDev

MLE

ECap

StdDev

StdDev

RCE

ECap

ECap RCE/MLE

$43

$61

$718

$844

$2,654

$3,135

$79

$119

$1,081

$1,402

$3,998

$4,277

95.5%

93.1%

93.3%

92.0%

92.4%

91.0%

86.6%

76.5%

83.0%

72.1%

81.2%

73.6%

$45

$65

$761

$905

$2,837

$3,392

$90

$152

$1,273

$1,883

$4,796

$5,653

$43

$61

$718

$844

$2,654

$3,133

$79

$119

$1,080

$1,401

$3,993

$4,277

96.1%

94.1%

94.3%

93.2%

93.5%

92.4%

88.2%

78.3%

84.9%

74.4%

83.3%

75.7%

$173

$249

$2,917

$3,453

$10,840

$12,900

$345

$548

$4,520

$6,771

$18,152

$20,252

$161

$130

$1,012

$744

$1,918

$1,470

$954

$388

$2,642

$1,244

$4,386

$2,236

$148

$122

$917

$690

$1,735

$1,357

$437

$290

$1,628

$1,059

$2,800

$1,903

92.1%

93.7%

90.7%

92.7%

90.4%

92.3%

45.8%

74.7%

61.6%

85.1%

63.8%

85.1%

$159

$129

$996

$735

$1,883

$1,450

$935

$382

$2,561

$1,218

$4,272

$2,178

$148

$122

$916

$689

$1,731

$1,355

$437

$289

$1,626

$1,057

$2,797

$1,895

92.9%

94.2%

92.0%

93.7%

91.9%

93.4%

46.8%

75.9%

63.5%

86.8%

65.5%

87.0%

$1,013

$1,384

$3,459

$4,610

$6,704

$8,272

$790

$935

$4,111

$4,201

$7,004

$9,696

$678

$854

$2,227

$2,846

$4,203

$4,993

$538

$627

$2,623

$2,632

$4,409

$5,776

67.0%

61.7%

64.4%

61.7%

62.7%

60.4%

68.1%

67.1%

63.8%

62.6%

63.0%

59.6%

$974

$1,327

$3,322

$4,422

$6,438

$7,936

$762

$903

$3,974

$4,037

$6,735

$9,416

$678

$853

$2,225

$2,843

$4,199

$4,988

$538

$627

$2,622

$2,631

$4,407

$5,772

69.6%

64.3%

67.0%

64.3%

65.2%

62.9%

70.6%

69.5%

66.0%

65.2%

65.4%

61.3%

PAGE 68 of 78

95%CIs

MLE

ECap

95%CIs

95%CIs

RCE

ECap

ECap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

ECap

IQR

IQR

RCE

ECap

ECap RCE/MLE

Skew

MLE

ECap

Skew

RCE

ECap

Kurtosis

MLE

ECap

Kurtosis

RCE

ECap

$166

$234

$2,747

$3,214

$10,120

$11,891

$311

$434

$3,900

$5,241

$15,265

$15,400

95.8%

94.0%

94.2%

93.1%

93.4%

92.2%

90.2%

79.2%

86.3%

77.4%

84.1%

76.0%

0.293

0.387

0.379

0.424

0.412

0.458

0.471

0.689

0.603

0.779

0.650

0.737

0.291

0.384

0.375

0.420

0.409

0.454

0.449

0.622

0.574

0.703

0.617

0.674

$55

$75

$886

$1,029

$3,246

$3,788

$97

$141

$1,261

$1,741

$4,638

$5,485

$53

$72

$841

$967

$3,059

$3,528

$86

$117

$1,085

$1,381

$3,996

$4,376

96.6%

94.8%

94.9%

94.0%

94.3%

93.1%

88.7%

83.4%

86.0%

79.3%

86.2%

79.8%

0.91

1.16

1.14

1.26

1.23

1.35

1.84

3.17

2.26

3.02

2.54

2.83

0.90

1.15

1.13

1.25

1.22

1.34

1.72

2.66

2.15

2.44

2.37

2.46

1.02

1.72

1.65

2.04

1.93

2.36

5.41

19.26

8.95

17.56

11.14

14.86

1.01

1.68

1.61

2.00

1.89

2.31

4.64

13.40

8.21

10.37

9.70

11.40

$616

$495

$3,713

$2,764

$7,221

$5,230

$2,145

$1,181

$8,394

$4,685

$13,163

$8,111

$570

$469

$3,395

$2,591

$6,717

$4,902

$1,241

$984

$5,704

$4,112

$9,326

$7,066

92.6%

94.7%

91.5%

93.7%

93.0%

93.7%

57.9%

83.4%

68.0%

87.8%

70.9%

87.1%

0.485

0.401

0.516

0.458

0.540

0.474

1.511

0.821

1.004

0.629

1.022

0.628

0.480

0.397

0.509

0.453

0.533

0.469

1.023

0.712

0.818

0.604

0.839

0.602

$177

$154

$1,110

$846

$2,115

$1,645

$451

$291

$1,877

$1,324

$3,282

$2,323

$165

$147

$1,033

$795

$1,951

$1,559

$299

$250

$1,462

$1,184

$2,555

$2,062

93.0%

95.0%

93.1%

94.1%

92.3%

94.8%

66.3%

85.7%

77.9%

89.4%

77.9%

88.8%

1.84

1.38

1.67

1.40

1.66

1.88

10.07

7.38

4.21

1.76

5.29

2.50

1.81

1.36

1.64

1.38

1.64

1.85

5.66

5.18

2.94

1.65

3.33

2.31

5.72

2.95

4.71

2.97

4.32

7.63

160.42

113.19

28.24

4.37

49.11

13.17

5.53

2.84

4.51

2.90

4.21

7.39

50.99

61.98

13.90

3.78

19.31

11.29

$3,457

$4,499

$11,336

$14,996

$21,470

$26,558

$3,019

$3,112

$11,968

$13,671

$24,025

$25,151

$2,408

$2,960

$7,744

$9,867

$13,980

$16,654

$2,130

$2,203

$8,109

$9,199

$15,841

$15,986

69.6%

65.8%

68.3%

65.8%

65.1%

62.7%

70.6%

70.8%

67.8%

67.3%

65.9%

63.6%

1.032

1.188

1.110

1.189

1.160

1.229

0.939

1.033

1.181

1.101

1.146

1.423

0.972

1.112

1.043

1.113

1.088

1.148

0.888

0.974

1.094

1.026

1.078

1.281

$822

$990

$2,654

$3,292

$4,936

$5,761

$652

$715

$2,823

$3,067

$5,115

$5,692

$594

$672

$1,846

$2,230

$3,365

$3,871

$475

$525

$1,968

$2,124

$3,486

$3,829

72.3%

67.9%

69.5%

67.7%

68.2%

67.2%

72.8%

73.5%

69.7%

69.3%

68.1%

67.3%

3.44

3.98

3.71

3.99

3.93

4.19

2.83

3.45

5.06

4.57

3.95

8.95

3.20

3.66

3.44

3.67

3.63

3.84

2.67

3.25

4.53

4.04

3.70

7.54

17.63

23.72

20.60

23.80

23.30

26.50

12.10

18.04

42.28

42.29

25.63

137.22

15.28

20.04

17.70

20.11

19.79

22.21

10.62

16.12

34.44

33.55

22.80

101.58

TABLE F7a

RCE vs. LDA for Regulatory Capital Estimation Under iid ($m, λ=75)*

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

RCap

Mean

MLE

RCap

MLE

Bias

MLE

Bias%

Mean

RCE

RCap

RCE

Bias

RCE

Bias%

RMSE

MLE

RCap

$110

$103

$1,250

$1,236

$4,059

$4,074

$133

$136

$1,251

$1,259

$4,079

$3,978

$112

$106

$1,285

$1,281

$4,198

$4,252

$138

$146

$1,327

$1,434

$4,456

$4,505

$2

$3

$35

$45

$139

$177

$5

$10

$76

$175

$377

$527

1.5%

3.0%

2.8%

3.7%

3.4%

4.4%

3.6%

7.3%

6.0%

13.9%

9.2%

13.2%

$110

$103

$1,246

$1,234

$4,051

$4,075

$132

$136

$1,244

$1,290

$4,130

$4,046

-$1

$0

-$4

-$2

-$7

$1

-$1

-$1

-$7

$31

$51

$68

-0.5%

-0.3%

-0.3%

-0.1%

-0.2%

0.0%

-0.8%

-0.5%

-0.6%

2.4%

1.3%

1.7%

$25

$32

$375

$420

$1,338

$1,509

$45

$65

$543

$798

$2,049

$2,606

$184

$198

$1,004

$925

$1,765

$1,720

$261

$257

$1,104

$1,049

$1,820

$1,817

$192

$205

$1,062

$962

$1,857

$1,777

$299

$277

$1,290

$1,130

$2,111

$1,967

$8

$6

$58

$37

$92

$58

$38

$20

$186

$81

$291

$150

4.4%

3.2%

5.8%

4.0%

5.2%

3.3%

14.6%

7.7%

16.9%

7.7%

16.0%

8.3%

$185

$199

$1,019

$932

$1,780

$1,719

$258

$257

$1,138

$1,062

$1,879

$1,852

$1

$1

$16

$7

$15

-$1

-$3

$0

$34

$13

$59

$36

0.8%

0.3%

1.5%

0.7%

0.8%

-0.1%

-1.0%

0.1%

3.1%

1.2%

3.2%

2.0%

$361

$344

$1,027

$1,146

$1,782

$1,889

$334

$341

$1,178

$1,231

$1,923

$2,041

$424

$423

$1,232

$1,407

$2,170

$2,347

$393

$408

$1,421

$1,516

$2,383

$2,542

$63

$79

$206

$261

$388

$458

$59

$67

$243

$285

$461

$501

17.6%

23.0%

20.0%

22.8%

21.8%

24.3%

17.7%

19.6%

20.6%

23.2%

24.0%

24.6%

$360

$345

$1,027

$1,149

$1,784

$1,896

$333

$343

$1,174

$1,236

$1,940

$2,050

$0

$1

$0

$3

$2

$7

$0

$2

-$4

$6

$17

$9

-0.1%

0.4%

0.0%

0.2%

0.1%

0.4%

-0.1%

0.7%

-0.3%

0.5%

0.9%

0.4%

*NOTE: #simulations = 1,000; λ = 75 for 10 years so n ~ 750; α=0.999

RMSE

RMSE

RCE

RCap

RCap RCE/MLE

StdDev

MLE

RCap

StdDev

StdDev

RCE

RCap

RCap RCE/MLE

95%CIs

MLE

RCap

95%CIs

95%CIs

RCE

RCap

RCap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

RCap

$24

$30

$360

$400

$1,277

$1,427

$42

$56

$491

$666

$1,814

$2,194

97.4%

95.9%

96.1%

95.2%

95.5%

94.6%

92.9%

87.1%

90.5%

83.4%

88.6%

84.2%

$25

$32

$373

$418

$1,330

$1,498

$45

$64

$538

$779

$2,014

$2,552

$24

$30

$360

$400

$1,277

$1,427

$42

$56

$491

$665

$1,814

$2,193

97.6%

96.4%

96.5%

95.8%

96.0%

95.3%

93.4%

88.2%

91.3%

85.4%

90.1%

85.9%

$96

$120

$1,422

$1,582

$5,045

$5,646

$174

$241

$2,168

$2,716

$7,870

$9,400

$93

$115

$1,365

$1,508

$4,819

$5,355

$160

$212

$1,988

$2,337

$7,053

$8,172

97.5%

95.8%

95.9%

95.4%

95.5%

94.8%

92.4%

88.1%

91.7%

86.1%

89.6%

86.9%

0.222

0.297

0.291

0.326

0.317

0.352

0.323

0.437

0.405

0.543

0.452

0.567

0.221

0.296

0.289

0.324

0.315

0.350

0.315

0.416

0.395

0.515

0.439

0.542

$33

$40

$477

$528

$1,685

$1,874

$55

$73

$616

$862

$2,323

$2,836

$32

$39

$464

$508

$1,626

$1,791

$51

$66

$569

$749

$2,120

$2,487

$68

$64

$427

$316

$760

$615

$211

$134

$920

$506

$1,390

$893

$64

$61

$404

$302

$718

$588

$162

$119

$740

$459

$1,153

$812

95.2%

96.1%

94.6%

95.6%

94.4%

95.6%

76.6%

88.3%

80.4%

90.6%

83.0%

91.0%

$67

$63

$424

$313

$754

$612

$208

$133

$901

$500

$1,359

$880

$64

$61

$404

$302

$718

$588

$162

$119

$739

$459

$1,151

$812

95.9%

96.6%

95.4%

96.3%

95.1%

96.1%

77.9%

89.3%

82.0%

91.8%

84.7%

92.2%

$256

$236

$1,616

$1,232

$2,946

$2,424

$723

$489

$3,334

$1,873

$5,320

$3,313

$246

$228

$1,543

$1,183

$2,796

$2,340

$587

$439

$2,762

$1,740

$4,437

$3,053

96.0%

96.4%

95.5%

96.0%

94.9%

96.5%

81.2%

89.8%

82.9%

92.9%

83.4%

92.2%

0.350

0.310

0.399

0.326

0.406

0.344

0.694

0.481

0.699

0.443

0.644

0.448

0.348

0.308

0.396

0.324

0.403

0.342

0.625

0.462

0.649

0.432

0.613

0.438

$84

$82

$516

$401

$948

$766

$196

$146

$860

$593

$1,365

$1,034

$278

$318

$867

$1,057

$1,595

$1,822

$276

$301

$1,129

$1,193

$1,969

$2,066

$223

$244

$681

$812

$1,235

$1,384

$220

$238

$877

$913

$1,504

$1,562

80.4%

76.8%

78.6%

76.8%

77.4%

75.9%

80.0%

79.0%

77.7%

76.5%

76.4%

75.6%

$271

$308

$842

$1,024

$1,547

$1,763

$269

$293

$1,102

$1,159

$1,915

$2,004

$223

$244

$681

$812

$1,235

$1,384

$220

$238

$877

$912

$1,504

$1,562

82.6%

79.3%

80.9%

79.3%

79.8%

78.5%

81.9%

81.0%

79.6%

78.8%

78.6%

77.9%

$1,035

$1,170

$3,180

$3,900

$5,867

$6,780

$994

$1,039

$3,765

$4,039

$6,545

$7,470

$843

$923

$2,555

$3,077

$4,647

$5,254

$814

$844

$3,012

$3,183

$5,202

$5,817

81.4%

78.9%

80.3%

78.9%

79.2%

77.5%

81.9%

81.3%

80.0%

78.8%

79.5%

77.9%

0.638

0.728

0.683

0.728

0.713

0.751

0.685

0.720

0.776

0.764

0.803

0.789

0.620

0.706

0.663

0.706

0.692

0.730

0.661

0.693

0.747

0.738

0.776

0.762

$313

$332

$932

$1,103

$1,679

$1,862

$270

$280

$994

$1,157

$1,733

$1,911

PAGE 69 of 78

IQR

IQR

RCE

RCap

RCap RCE/MLE

Skew

MLE

RCap

Skew

RCE

RCap

Kurtosis

MLE

RCap

Kurtosis

RCE

RCap

98.8%

97.0%

97.3%

96.2%

96.5%

95.6%

93.6%

89.6%

92.3%

86.9%

91.3%

87.7%

0.75

1.04

1.01

1.16

1.12

1.28

1.14

1.56

1.28

2.03

1.62

2.05

0.74

1.03

1.00

1.15

1.11

1.26

1.09

1.45

1.24

1.89

1.57

1.94

1.63

2.88

2.75

3.52

3.31

4.19

2.22

3.63

2.18

7.26

4.15

7.51

1.61

2.83

2.70

3.45

3.24

4.10

2.04

3.00

2.03

6.35

3.88

6.72

$80

$80

$497

$390

$902

$739

$165

$132

$737

$552

$1,196

$952

95.5%

96.9%

96.3%

97.2%

95.1%

96.4%

84.1%

90.7%

85.6%

93.0%

87.7%

92.1%

1.06

0.99

1.16

0.93

1.15

1.07

2.73

1.87

2.38

1.34

1.98

1.51

1.06

0.98

1.15

0.93

1.14

1.06

2.39

1.72

2.09

1.30

1.88

1.45

1.89

1.69

2.00

1.63

1.95

1.59

11.50

7.04

8.63

2.80

5.86

4.01

1.88

1.64

1.98

1.60

1.91

1.58

9.10

5.75

6.25

2.60

5.30

3.65

$262

$265

$764

$881

$1,344

$1,467

$226

$232

$806

$927

$1,377

$1,507

83.8%

79.8%

82.0%

79.9%

80.1%

78.8%

83.9%

83.1%

81.1%

80.1%

79.5%

78.8%

1.75

2.01

1.88

2.02

1.97

2.10

2.50

2.89

3.69

2.45

3.12

2.34

1.71

1.96

1.83

1.97

1.93

2.05

2.42

2.71

3.56

2.36

3.03

2.26

4.25

5.93

5.07

5.99

5.69

6.56

10.67

17.85

27.76

10.07

19.22

8.34

4.05

5.65

4.82

5.71

5.41

6.25

9.98

15.44

26.34

9.29

18.38

7.85

TABLE F7b

RCE vs. LDA for Economic Capital Estimation Under iid ($m, λ=75)*

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

ECap

Mean

MLE

ECap

MLE

Bias

MLE

Bias%

Mean

RCE

ECap

RCE

Bias

RCE

Bias%

RMSE

MLE

ECap

$179

$199

$2,372

$2,534

$8,160

$8,838

$209

$228

$2,266

$2,435

$7,882

$8,072

$182

$206

$2,449

$2,641

$8,482

$9,278

$218

$250

$2,433

$2,849

$8,751

$9,372

$3

$7

$77

$107

$322

$441

$10

$22

$167

$414

$869

$1,300

1.8%

3.4%

3.2%

4.2%

3.9%

5.0%

4.6%

9.5%

7.4%

17.0%

11.0%

16.1%

$178

$199

$2,370

$2,537

$8,165

$8,864

$207

$228

$2,259

$2,513

$8,024

$8,266

-$1

$0

-$2

$3

$5

$26

-$1

$0

-$7

$77

$142

$194

-0.4%

-0.1%

-0.1%

0.1%

0.1%

0.3%

-0.6%

0.0%

-0.3%

3.2%

1.8%

2.4%

$44

$66

$763

$923

$2,881

$3,508

$80

$127

$1,098

$1,781

$4,434

$6,039

$401

$392

$2,337

$1,922

$4,198

$3,657

$555

$501

$2,523

$2,167

$4,259

$3,843

$423

$407

$2,501

$2,015

$4,467

$3,808

$666

$553

$3,089

$2,380

$5,138

$4,239

$22

$16

$164

$93

$268

$152

$111

$52

$566

$213

$879

$396

5.4%

4.0%

7.0%

4.8%

6.4%

4.1%

20.1%

10.3%

22.4%

9.8%

20.6%

10.3%

$406

$394

$2,389

$1,943

$4,258

$3,667

$547

$505

$2,632

$2,210

$4,444

$3,948

$5

$3

$52

$22

$60

$10

-$8

$4

$109

$42

$185

$104

1.2%

0.6%

2.2%

1.1%

1.4%

0.3%

-1.4%

0.8%

4.3%

2.0%

4.3%

2.7%

$924

$1,067

$2,897

$3,556

$5,358

$6,163

$826

$872

$3,291

$3,628

$5,743

$6,330

$1,139

$1,389

$3,665

$4,622

$6,898

$8,127

$1,024

$1,103

$4,203

$4,751

$7,581

$8,404

$215

$322

$767

$1,066

$1,539

$1,964

$198

$231

$912

$1,122

$1,837

$2,073

23.3%

30.2%

26.5%

30.0%

28.7%

31.9%

23.9%

26.5%

27.7%

30.9%

32.0%

32.8%

$927

$1,076

$2,912

$3,582

$5,391

$6,214

$830

$885

$3,302

$3,672

$5,844

$6,406

$3

$10

$14

$26

$33

$51

$4

$13

$11

$44

$101

$75

0.4%

0.9%

0.5%

0.7%

0.6%

0.8%

0.4%

1.5%

0.3%

1.2%

1.8%

1.2%

*NOTE: #simulations = 1,000; λ = 75 for 10 years so n ~ 750; α=0.9997

RMSE

RMSE

RCE

ECap

ECap RCE/MLE

StdDev

MLE

ECap

StdDev

StdDev

RCE

ECap

ECap RCE/MLE

$42

$63

$731

$876

$2,740

$3,303

$73

$108

$979

$1,440

$3,865

$4,945

97.2%

95.6%

95.8%

94.9%

95.1%

94.2%

91.8%

84.9%

89.2%

80.9%

87.2%

81.9%

$44

$65

$759

$917

$2,863

$3,480

$79

$125

$1,085

$1,733

$4,348

$5,897

$42

$63

$731

$876

$2,740

$3,303

$73

$108

$979

$1,438

$3,862

$4,941

97.5%

96.1%

96.2%

95.5%

95.7%

94.9%

92.5%

86.2%

90.2%

83.0%

88.8%

83.8%

$166

$246

$2,869

$3,444

$10,772

$13,001

$306

$460

$4,365

$5,938

$17,033

$21,344

$164

$139

$1,105

$723

$2,003

$1,443

$558

$310

$2,570

$1,202

$3,867

$2,161

$155

$133

$1,037

$688

$1,878

$1,372

$389

$266

$1,944

$1,070

$3,073

$1,933

94.6%

95.6%

93.9%

95.1%

93.7%

95.1%

69.8%

85.9%

75.6%

89.0%

79.5%

89.4%

$163

$139

$1,092

$717

$1,985

$1,435

$546

$306

$2,507

$1,183

$3,766

$2,125

$155

$133

$1,036

$688

$1,877

$1,372

$389

$266

$1,941

$1,069

$3,067

$1,930

95.4%

96.2%

94.8%

95.9%

94.5%

95.6%

71.3%

87.1%

77.4%

90.4%

81.4%

90.8%

$868

$1,207

$2,987

$4,015

$5,867

$7,291

$851

$968

$3,988

$4,379

$7,385

$7,964

$664

$872

$2,221

$2,902

$4,281

$5,192

$645

$722

$2,921

$3,144

$5,298

$5,636

76.4%

72.2%

74.3%

72.3%

73.0%

71.2%

75.8%

74.6%

73.3%

71.8%

71.7%

70.8%

$841

$1,163

$2,887

$3,870

$5,661

$7,021

$828

$940

$3,882

$4,233

$7,153

$7,689

$664

$872

$2,221

$2,902

$4,281

$5,192

$645

$722

$2,921

$3,144

$5,297

$5,635

78.9%

75.0%

76.9%

75.0%

75.6%

73.9%

78.0%

76.8%

75.3%

74.3%

74.1%

73.3%

PAGE 70 of 78

95%CIs

MLE

ECap

95%CIs

95%CIs

RCE

ECap

ECap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

ECap

IQR

IQR

RCE

ECap

ECap RCE/MLE

Skew

MLE

ECap

Skew

RCE

ECap

Kurtosis

MLE

ECap

Kurtosis

RCE

ECap

$162

$236

$2,757

$3,284

$10,292

$12,320

$284

$403

$3,960

$4,994

$15,067

$18,081

97.4%

96.0%

96.1%

95.4%

95.6%

94.8%

92.7%

87.5%

90.7%

84.1%

88.5%

84.7%

0.240

0.317

0.310

0.347

0.338

0.375

0.364

0.498

0.446

0.608

0.497

0.629

0.238

0.315

0.308

0.345

0.336

0.373

0.354

0.471

0.433

0.572

0.481

0.598

$57

$83

$968

$1,153

$3,613

$4,320

$95

$138

$1,233

$1,827

$4,824

$6,260

$56

$80

$934

$1,102

$3,462

$4,105

$89

$121

$1,121

$1,577

$4,397

$5,420

97.6%

96.3%

96.4%

95.6%

95.8%

95.0%

93.4%

87.7%

90.9%

86.3%

91.1%

86.6%

0.82

1.13

1.10

1.27

1.22

1.40

1.28

1.75

1.39

2.30

1.77

2.28

0.81

1.12

1.09

1.25

1.21

1.38

1.22

1.61

1.35

2.11

1.70

2.14

1.93

3.41

3.25

4.18

3.92

4.99

2.78

4.77

2.58

9.09

4.92

9.32

1.90

3.35

3.19

4.09

3.84

4.88

2.55

3.81

2.40

7.76

4.55

8.18

$618

$512

$4,134

$2,800

$7,800

$5,710

$1,827

$1,111

$9,207

$4,360

$14,868

$7,924

$590

$497

$3,945

$2,687

$7,332

$5,468

$1,392

$981

$7,231

$4,012

$11,839

$7,205

95.5%

97.0%

95.4%

95.9%

94.0%

95.8%

76.2%

88.2%

78.5%

92.0%

79.6%

90.9%

0.384

0.340

0.437

0.356

0.444

0.377

0.820

0.553

0.812

0.497

0.733

0.501

0.381

0.338

0.434

0.354

0.441

0.374

0.711

0.527

0.738

0.484

0.690

0.489

$201

$178

$1,299

$919

$2,419

$1,782

$476

$318

$2,184

$1,365

$3,562

$2,456

$192

$171

$1,241

$879

$2,293

$1,704

$377

$285

$1,852

$1,263

$3,002

$2,218

95.5%

96.0%

95.5%

95.6%

94.8%

95.7%

79.3%

89.7%

84.8%

92.5%

84.3%

90.3%

1.17

1.09

1.26

1.03

1.25

1.15

3.16

2.21

2.81

1.52

2.23

1.71

1.16

1.08

1.25

1.02

1.24

1.14

2.64

1.99

2.34

1.46

2.09

1.64

2.26

2.05

2.40

1.99

2.34

1.85

14.87

10.14

12.31

3.67

7.40

5.25

2.24

1.99

2.36

1.96

2.29

1.83

10.80

7.90

7.90

3.38

6.56

4.73

$3,207

$4,372

$10,866

$14,574

$21,129

$26,759

$2,988

$3,242

$12,841

$14,211

$23,816

$28,569

$2,494

$3,251

$8,327

$10,836

$15,859

$19,663

$2,326

$2,506

$9,740

$10,598

$17,844

$20,769

77.8%

74.4%

76.6%

74.4%

75.1%

73.5%

77.8%

77.3%

75.9%

74.6%

74.9%

72.7%

0.738

0.837

0.788

0.837

0.821

0.864

0.808

0.852

0.924

0.891

0.944

0.915

0.716

0.810

0.763

0.810

0.794

0.836

0.777

0.816

0.885

0.856

0.906

0.880

$920

$1,165

$3,005

$3,870

$5,732

$6,967

$780

$825

$3,175

$3,889

$5,940

$6,704

$734

$896

$2,362

$2,985

$4,409

$5,190

$613

$655

$2,433

$2,951

$4,474

$5,060

79.9%

76.9%

78.6%

77.2%

76.9%

74.5%

78.7%

79.4%

76.6%

75.9%

75.3%

75.5%

1.99

2.30

2.15

2.31

2.26

2.40

2.95

3.62

4.54

2.91

3.76

2.71

1.94

2.23

2.09

2.24

2.19

2.33

2.83

3.34

4.37

2.77

3.62

2.61

5.58

7.80

6.66

7.87

7.47

8.64

14.66

27.96

40.78

14.08

27.63

11.34

5.28

7.34

6.27

7.40

7.03

8.10

13.57

23.58

38.39

12.78

26.07

10.46

TABLE F8a

RCE vs. LDA for Regulatory Capital Estimation Under iid ($m, λ=100)*

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

RCap

Mean

MLE

RCap

MLE

Bias

MLE

Bias%

Mean

RCE

RCap

RCE

Bias

RCE

Bias%

RMSE

MLE

RCap

$128

$122

$1,478

$1,483

$4,852

$4,949

$155

$159

$1,470

$1,496

$4,842

$4,767

$130

$126

$1,518

$1,534

$5,010

$5,148

$159

$168

$1,547

$1,621

$5,114

$5,184

$2

$3

$40

$51

$157

$200

$4

$8

$77

$125

$272

$418

1.5%

2.8%

2.7%

3.4%

3.2%

4.0%

2.9%

5.3%

5.2%

8.4%

5.6%

8.8%

$128

$123

$1,479

$1,487

$4,861

$4,966

$154

$158

$1,472

$1,498

$4,829

$4,781

$0

$0

$1

$3

$9

$18

-$1

-$1

$2

$2

-$12

$14

-0.1%

0.1%

0.1%

0.2%

0.2%

0.4%

-0.4%

-0.4%

0.2%

0.1%

-0.3%

0.3%

$25

$33

$392

$446

$1,414

$1,619

$43

$63

$573

$742

$1,963

$2,601

$224

$237

$1,238

$1,116

$2,188

$2,083

$317

$307

$1,357

$1,264

$2,249

$2,198

$226

$238

$1,254

$1,122

$2,223

$2,092

$360

$327

$1,492

$1,325

$2,471

$2,294

$3

$1

$16

$7

$35

$9

$43

$20

$135

$61

$222

$95

1.1%

0.4%

1.3%

0.6%

1.6%

0.4%

13.5%

6.6%

9.9%

4.8%

9.9%

4.3%

$224

$236

$1,238

$1,110

$2,193

$2,069

$324

$310

$1,366

$1,265

$2,270

$2,192

$0

-$1

$0

-$5

$5

-$14

$7

$3

$9

$1

$21

-$6

0.0%

-0.6%

0.0%

-0.5%

0.2%

-0.7%

2.1%

0.9%

0.6%

0.0%

0.9%

-0.3%

$455

$452

$1,322

$1,507

$2,327

$2,512

$418

$430

$1,514

$1,600

$2,508

$2,684

$519

$534

$1,536

$1,784

$2,730

$2,997

$479

$499

$1,753

$1,885

$2,937

$3,196

$64

$82

$213

$277

$403

$484

$60

$69

$239

$285

$429

$512

14.0%

18.2%

16.1%

18.3%

17.3%

19.3%

14.4%

16.0%

15.8%

17.8%

17.1%

19.1%

$457

$456

$1,331

$1,521

$2,341

$2,534

$421

$436

$1,511

$1,609

$2,501

$2,703

$2

$4

$9

$14

$14

$22

$2

$6

-$3

$9

-$6

$19

0.3%

0.8%

0.7%

0.9%

0.6%

0.9%

0.6%

1.4%

-0.2%

0.6%

-0.2%

0.7%

*NOTE: #simulations = 1,000; λ = 100 for 10 years so n ~ 1,000; α=0.999

RMSE

RMSE

RCE

RCap

RCap RCE/MLE

StdDev

MLE

RCap

StdDev

StdDev

RCE

RCap

RCap RCE/MLE

95%CIs

MLE

RCap

95%CIs

95%CIs

RCE

RCap

RCap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

RCap

$25

$32

$378

$427

$1,357

$1,542

$41

$57

$529

$652

$1,801

$2,291

97.7%

96.4%

96.5%

95.8%

96.0%

95.2%

94.5%

90.4%

92.4%

87.8%

91.8%

88.1%

$25

$33

$390

$443

$1,405

$1,606

$43

$63

$568

$731

$1,944

$2,567

$25

$32

$378

$427

$1,357

$1,542

$41

$57

$529

$652

$1,801

$2,291

97.9%

96.9%

97.0%

96.4%

96.6%

96.0%

95.0%

91.2%

93.3%

89.1%

92.7%

89.2%

$100

$130

$1,534

$1,740

$5,522

$6,303

$165

$250

$2,204

$2,809

$7,232

$9,703

$98

$126

$1,485

$1,674

$5,322

$6,037

$158

$226

$2,053

$2,538

$6,704

$8,673

98.2%

96.7%

96.8%

96.2%

96.4%

95.8%

95.3%

90.5%

93.1%

90.3%

92.7%

89.4%

0.195

0.263

0.257

0.289

0.280

0.312

0.270

0.374

0.367

0.451

0.380

0.495

0.194

0.262

0.256

0.287

0.279

0.310

0.265

0.361

0.360

0.435

0.373

0.479

$32

$41

$484

$543

$1,727

$1,953

$53

$71

$683

$843

$2,431

$2,923

$32

$40

$473

$526

$1,679

$1,883

$50

$66

$645

$763

$2,250

$2,641

$68

$62

$401

$314

$749

$596

$244

$147

$872

$529

$1,446

$907

$67

$61

$395

$310

$737

$589

$197

$134

$757

$493

$1,266

$849

98.6%

98.9%

98.5%

98.8%

98.4%

98.7%

80.6%

91.2%

86.9%

93.3%

87.5%

93.6%

$68

$62

$401

$314

$748

$596

$240

$145

$862

$525

$1,429

$902

$67

$61

$395

$310

$737

$588

$197

$134

$757

$493

$1,266

$849

98.6%

98.9%

98.5%

98.8%

98.5%

98.7%

81.9%

92.0%

87.9%

93.9%

88.6%

94.1%

$269

$241

$1,539

$1,189

$2,830

$2,225

$798

$577

$3,102

$2,018

$5,816

$3,487

$265

$238

$1,521

$1,175

$2,794

$2,197

$672

$531

$2,732

$1,900

$5,118

$3,273

98.6%

98.8%

98.8%

98.8%

98.7%

98.7%

84.2%

92.0%

88.1%

94.2%

88.0%

93.9%

0.302

0.259

0.319

0.280

0.336

0.285

0.668

0.444

0.577

0.397

0.578

0.393

0.302

0.259

0.319

0.279

0.336

0.284

0.608

0.431

0.555

0.390

0.558

0.387

$90

$81

$518

$401

$945

$748

$219

$162

$907

$637

$1,526

$1,099

$315

$374

$1,006

$1,250

$1,866

$2,168

$289

$297

$1,098

$1,207

$1,982

$2,240

$266

$304

$832

$1,015

$1,525

$1,745

$242

$246

$901

$978

$1,604

$1,796

84.2%

81.2%

82.7%

81.2%

81.7%

80.5%

83.7%

83.0%

82.1%

81.0%

80.9%

80.2%

$309

$365

$983

$1,219

$1,822

$2,113

$283

$289

$1,071

$1,173

$1,935

$2,181

$266

$304

$832

$1,014

$1,525

$1,745

$242

$246

$901

$978

$1,604

$1,796

86.0%

83.2%

84.6%

83.2%

83.7%

82.6%

85.6%

85.3%

84.1%

83.4%

82.9%

82.4%

$1,132

$1,264

$3,491

$4,214

$6,360

$7,218

$1,019

$1,123

$4,063

$4,254

$6,927

$8,066

$982

$1,064

$2,992

$3,546

$5,351

$6,034

$871

$961

$3,418

$3,544

$5,740

$6,654

86.8%

84.1%

85.7%

84.1%

84.1%

83.6%

85.5%

85.6%

84.1%

83.3%

82.9%

82.5%

0.596

0.683

0.640

0.683

0.667

0.705

0.591

0.579

0.611

0.622

0.659

0.682

0.582

0.667

0.625

0.667

0.651

0.689

0.576

0.565

0.596

0.608

0.641

0.665

$336

$378

$1,045

$1,261

$1,900

$2,153

$312

$325

$1,189

$1,361

$2,025

$2,389

PAGE 71 of 78

IQR

IQR

RCE

RCap

RCap RCE/MLE

Skew

MLE

RCap

Skew

RCE

RCap

Kurtosis

MLE

RCap

Kurtosis

RCE

RCap

98.4%

97.6%

97.7%

97.0%

97.2%

96.4%

95.7%

92.1%

94.3%

90.5%

92.6%

90.4%

0.75

0.96

0.94

1.04

1.01

1.12

1.06

1.27

1.28

1.62

1.07

1.94

0.74

0.95

0.93

1.04

1.01

1.12

1.03

1.23

1.25

1.54

1.05

1.84

1.07

1.69

1.63

1.99

1.89

2.28

1.68

1.82

2.19

4.21

1.27

7.94

1.07

1.69

1.62

1.98

1.88

2.27

1.58

1.67

2.10

3.78

1.21

7.01

$88

$80

$509

$397

$930

$736

$191

$150

$817

$601

$1,369

$1,038

98.2%

98.9%

98.2%

98.9%

98.5%

98.4%

87.2%

92.9%

90.0%

94.4%

89.7%

94.4%

0.80

0.70

0.93

0.83

1.01

0.90

4.40

1.63

2.03

1.39

1.96

1.25

0.80

0.70

0.93

0.83

1.01

0.90

3.52

1.58

1.92

1.37

1.88

1.23

0.62

0.51

1.01

1.10

1.55

1.26

41.30

3.99

6.67

3.38

5.89

2.11

0.62

0.50

1.01

1.10

1.55

1.25

26.74

3.71

5.93

3.27

5.35

2.05

$292

$316

$895

$1,058

$1,606

$1,786

$276

$278

$1,007

$1,138

$1,683

$1,991

86.9%

83.7%

85.6%

83.9%

84.5%

83.0%

88.3%

85.7%

84.7%

83.6%

83.1%

83.3%

2.01

2.33

2.15

2.32

2.28

2.43

2.15

1.71

1.76

1.65

2.22

1.95

1.97

2.28

2.10

2.27

2.22

2.38

2.09

1.66

1.71

1.61

2.16

1.89

6.63

9.05

7.68

8.98

8.68

9.94

8.19

4.97

4.52

4.76

8.73

5.31

6.35

8.69

7.34

8.62

8.31

9.59

7.75

4.61

4.28

4.46

8.24

5.03

TABLE F8b

RCE vs. LDA for Economic Capital Estimation Under iid ($m, λ=100)*

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

Mean

True

MLE

Parm2

ECap

ECap

σ

2

$204

$208

2.55

$233

$241

2.5 $2,773 $2,860

2.77 $3,008 $3,126

2.7 $9,647 $10,005

2.97 $10,612 $11,100

1.95

$239

$247

2.2

$263

$281

2.385 $2,631 $2,799

2.65 $2,861 $3,156

2.6 $9,252 $9,877

2.8 $9,568 $10,598

b

2.65

$485

$494

3.3

$464

$468

2.5 $2,862 $2,915

3.15 $2,298 $2,321

2.45 $5,166 $5,282

3.07 $4,393 $4,430

2.65

$668

$792

3.3

$593

$646

2.5 $3,080 $3,491

3.15 $2,590 $2,752

2.45 $5,225 $5,914

3.07 $4,614 $4,875

θ

35,000 $1,164 $1,380

7,500 $1,402 $1,737

47,500 $3,728 $4,522

25,000 $4,674 $5,800

50,000 $6,994 $8,588

27,500 $8,195 $10,265

33,500 $1,034 $1,231

25,000 $1,098 $1,328

50,000 $4,226 $5,102

31,000 $4,716 $5,810

47,500 $7,486 $9,172

35,000 $8,322 $10,408

MLE

Bias

MLE

Bias%

Mean

RCE

ECap

RCE

Bias

RCE

Bias%

RMSE

MLE

ECap

$4

$8

$86

$118

$358

$488

$9

$18

$168

$295

$625

$1,031

1.8%

3.3%

3.1%

3.9%

3.7%

4.6%

3.7%

6.9%

6.4%

10.3%

6.8%

10.8%

$204

$234

$2,781

$3,021

$9,685

$10,675

$238

$263

$2,645

$2,876

$9,254

$9,644

$0

$1

$7

$13

$38

$63

-$1

$0

$14

$15

$1

$77

0.0%

0.3%

0.3%

0.4%

0.4%

0.6%

-0.2%

-0.1%

0.5%

0.5%

0.0%

0.8%

$44

$68

$789

$968

$3,011

$3,716

$76

$121

$1,143

$1,611

$4,136

$5,901

$8

$3

$53

$23

$116

$37

$123

$52

$411

$162

$689

$261

1.7%

0.7%

1.9%

1.0%

2.2%

0.8%

18.5%

8.8%

13.3%

6.3%

13.2%

5.7%

$487

$463

$2,875

$2,295

$5,205

$4,378

$689

$604

$3,129

$2,605

$5,327

$4,622

$2

-$1

$13

-$3

$40

-$15

$21

$11

$49

$15

$102

$8

0.4%

-0.3%

0.4%

-0.1%

0.8%

-0.3%

3.1%

1.8%

1.6%

0.6%

2.0%

0.2%

$216

$335

$794

$1,125

$1,594

$2,070

$197

$230

$876

$1,094

$1,686

$2,086

18.6%

23.9%

21.3%

24.1%

22.8%

25.3%

19.1%

20.9%

20.7%

23.2%

22.5%

25.1%

$1,175

$1,425

$3,780

$4,756

$7,088

$8,329

$1,046

$1,121

$4,236

$4,767

$7,504

$8,441

$11

$22

$52

$81

$94

$134

$12

$23

$10

$51

$19

$119

1.0%

1.6%

1.4%

1.7%

1.3%

1.6%

1.2%

2.1%

0.2%

1.1%

0.2%

1.4%

*NOTE: #simulations = 1,000; λ = 100 for 10 years so n ~ 1,000; α=0.9997

RMSE

RMSE

RCE

ECap

ECap RCE/MLE

StdDev

MLE

ECap

StdDev

StdDev

RCE

ECap

ECap RCE/MLE

$43

$65

$759

$924

$2,880

$3,524

$71

$107

$1,045

$1,385

$3,752

$5,092

97.5%

96.1%

96.2%

95.4%

95.6%

94.8%

93.7%

88.8%

91.5%

86.0%

90.7%

86.3%

$44

$67

$784

$961

$2,990

$3,683

$75

$120

$1,131

$1,584

$4,088

$5,810

$43

$65

$759

$924

$2,880

$3,523

$71

$107

$1,045

$1,385

$3,752

$5,091

97.8%

96.7%

96.8%

96.2%

96.3%

95.7%

94.3%

89.9%

92.5%

87.4%

91.8%

87.6%

$173

$266

$3,098

$3,787

$11,789

$14,489

$287

$481

$4,407

$6,059

$15,245

$21,708

$164

$133

$1,019

$710

$1,943

$1,379

$655

$333

$2,343

$1,233

$3,953

$2,151

$161

$131

$1,002

$701

$1,909

$1,360

$490

$298

$1,968

$1,136

$3,361

$1,991

98.4%

98.8%

98.3%

98.7%

98.2%

98.6%

74.8%

89.5%

84.0%

92.1%

85.0%

92.6%

$163

$133

$1,018

$710

$1,940

$1,379

$643

$329

$2,307

$1,222

$3,892

$2,135

$161

$131

$1,002

$701

$1,908

$1,360

$489

$298

$1,968

$1,136

$3,360

$1,991

98.5%

98.8%

98.4%

98.7%

98.4%

98.7%

76.1%

90.5%

85.3%

92.9%

86.3%

93.3%

$978

$1,412

$3,440

$4,713

$6,812

$8,610

$874

$918

$3,687

$4,275

$7,190

$8,429

$792

$1,094

$2,725

$3,652

$5,320

$6,596

$703

$731

$2,896

$3,304

$5,548

$6,431

81.0%

77.5%

79.2%

77.5%

78.1%

76.6%

80.4%

79.6%

78.5%

77.3%

77.2%

76.3%

$954

$1,372

$3,347

$4,576

$6,623

$8,357

$851

$889

$3,581

$4,132

$6,989

$8,166

$792

$1,094

$2,725

$3,651

$5,320

$6,594

$703

$730

$2,896

$3,304

$5,548

$6,430

83.0%

79.8%

81.4%

79.8%

80.3%

78.9%

82.5%

82.2%

80.9%

80.0%

79.4%

78.7%

PAGE 72 of 78

95%CIs

MLE

ECap

95%CIs

95%CIs

RCE

ECap

ECap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

ECap

IQR

IQR

RCE

ECap

ECap RCE/MLE

Skew

MLE

ECap

Skew

RCE

ECap

Kurtosis

MLE

ECap

Kurtosis

RCE

ECap

$169

$257

$2,992

$3,635

$11,334

$13,836

$272

$429

$4,064

$5,313

$13,984

$19,140

97.6%

96.5%

96.6%

96.0%

96.1%

95.5%

94.5%

89.3%

92.2%

87.7%

91.7%

88.2%

0.211

0.280

0.274

0.307

0.299

0.332

0.305

0.425

0.404

0.502

0.414

0.548

0.210

0.279

0.273

0.306

0.297

0.330

0.299

0.409

0.395

0.482

0.406

0.528

$56

$83

$967

$1,171

$3,655

$4,442

$92

$136

$1,339

$1,767

$5,101

$6,394

$55

$81

$943

$1,133

$3,543

$4,273

$87

$122

$1,249

$1,583

$4,697

$5,671

98.0%

97.4%

97.5%

96.7%

96.9%

96.2%

94.5%

90.0%

93.3%

89.6%

92.1%

88.7%

0.79

1.01

0.99

1.10

1.07

1.19

1.17

1.38

1.38

1.79

1.15

2.20

0.79

1.01

0.99

1.10

1.07

1.18

1.13

1.33

1.34

1.70

1.12

2.06

1.19

1.88

1.81

2.21

2.10

2.54

2.10

2.21

2.56

5.20

1.52

10.32

1.19

1.87

1.80

2.20

2.09

2.52

1.97

2.01

2.44

4.61

1.44

8.94

$643

$520

$3,916

$2,686

$7,331

$5,159

$2,039

$1,301

$8,199

$4,645

$15,824

$8,274

$632

$513

$3,871

$2,647

$7,209

$5,082

$1,640

$1,181

$7,028

$4,350

$13,649

$7,695

98.4%

98.7%

98.9%

98.6%

98.3%

98.5%

80.4%

90.7%

85.7%

93.7%

86.3%

93.0%

0.331

0.284

0.349

0.306

0.367

0.311

0.812

0.509

0.661

0.444

0.658

0.438

0.330

0.284

0.348

0.305

0.367

0.311

0.710

0.493

0.629

0.436

0.631

0.431

$210

$172

$1,296

$896

$2,420

$1,725

$523

$354

$2,302

$1,454

$3,985

$2,538

$207

$170

$1,276

$884

$2,397

$1,693

$446

$328

$2,020

$1,356

$3,505

$2,382

98.5%

98.8%

98.4%

98.6%

99.1%

98.1%

85.3%

92.6%

87.7%

93.3%

88.0%

93.9%

0.87

0.77

1.01

0.91

1.10

0.98

5.72

1.83

2.34

1.55

2.22

1.37

0.87

0.76

1.01

0.91

1.10

0.97

4.15

1.76

2.18

1.52

2.10

1.35

0.77

0.64

1.23

1.35

1.89

1.45

65.49

4.97

8.77

4.21

7.50

2.53

0.77

0.63

1.23

1.34

1.88

1.44

35.78

4.58

7.60

4.06

6.70

2.44

$3,443

$4,654

$11,683

$15,512

$22,671

$27,783

$3,018

$3,423

$13,519

$14,834

$24,710

$30,104

$2,892

$3,740

$9,629

$12,466

$18,364

$22,204

$2,491

$2,821

$11,043

$11,848

$19,648

$23,589

84.0%

80.4%

82.4%

80.4%

81.0%

79.9%

82.5%

82.4%

81.7%

79.9%

79.5%

78.4%

0.691

0.789

0.740

0.789

0.771

0.814

0.691

0.669

0.702

0.711

0.762

0.785

0.674

0.768

0.721

0.768

0.751

0.792

0.672

0.651

0.684

0.693

0.739

0.762

$978

$1,330

$3,384

$4,440

$6,545

$7,991

$890

$959

$3,772

$4,582

$6,800

$8,365

$824

$1,076

$2,784

$3,600

$5,336

$6,364

$745

$795

$3,064

$3,694

$5,470

$6,690

84.3%

80.9%

82.3%

81.1%

81.5%

79.6%

83.7%

82.9%

81.2%

80.6%

80.4%

80.0%

2.32

2.70

2.49

2.69

2.64

2.82

2.52

2.01

2.01

1.94

2.61

2.23

2.26

2.62

2.42

2.61

2.56

2.74

2.44

1.93

1.95

1.87

2.52

2.16

8.70

11.94

10.11

11.86

11.46

13.17

10.98

7.04

5.89

6.81

12.06

6.92

8.29

11.35

9.61

11.28

10.89

12.52

10.33

6.46

5.55

6.31

11.26

6.51

TABLE F9a

RCE vs. LDA for Regulatory Capital Estimation Under 5% Right-Tail Contamination ($m, λ=25)*

Severity

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg**

24.5

TLogg

34.5

TLogg## 24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

RCap

Mean

MLE

RCap

MLE

Bias

MLE

Bias%

Mean

RCE

RCap

RCE

Bias

RCE

Bias%

RMSE

MLE

RCap

$63

$53

$649

$603

$2,012

$1,893

$76

$76

$670

$643

$2,085

$1,956

$91

$62

$755

$724

$2,396

$2,330

$91

$103

$882

$970

$2,965

$2,897

$28

$9

$106

$121

$384

$437

$15

$27

$212

$327

$880

$941

44.6%

17.1%

16.4%

20.1%

19.1%

23.1%

19.2%

35.9%

31.7%

50.9%

42.2%

48.1%

$80

$56

$689

$648

$2,157

$2,055

$80

$79

$728

$675

$2,338

$2,058

$17

$3

$41

$45

$145

$162

$3

$4

$58

$33

$253

$103

26.7%

6.5%

6.3%

7.5%

7.2%

8.5%

4.4%

4.9%

8.7%

5.1%

12.1%

5.3%

$63

$34

$400

$436

$1,397

$1,532

$58

$102

$719

$1,192

$3,229

$3,457

$85

$100

$444

$448

$766

$818

$124

$130

$495

$510

$801

$867

$102

$114

$535

$516

$933

$947

$237

$180

$1,158

$671

$1,547

$1,123

$17

$14

$92

$68

$167

$129

$113

$51

$663

$162

$746

$256

19.8%

14.2%

20.7%

15.2%

21.7%

15.8%

91.5%

39.3%

133.8%

31.8%

93.1%

29.6%

$92

$104

$474

$469

$821

$857

$151

$132

$629

$560

$896

$956

$6

$5

$30

$21

$55

$39

$28

$2

$134

$50

$95

$89

7.6%

4.9%

6.8%

4.7%

7.2%

4.8%

22.3%

1.9%

27.0%

9.8%

11.8%

10.3%

$149

$121

$391

$403

$643

$636

$141

$140

$452

$451

$698

$717

$248

$228

$679

$742

$1,149

$1,202

$218

$222

$766

$789

$1,223

$1,364

$99

$107

$287

$340

$505

$566

$77

$82

$314

$338

$526

$647

66.5%

88.8%

73.5%

84.4%

78.6%

89.1%

54.4%

58.1%

69.5%

74.9%

75.4%

90.3%

$160

$132

$417

$432

$682

$678

$147

$146

$484

$482

$741

$802

$12

$11

$26

$29

$38

$42

$6

$6

$32

$31

$44

$85

7.9%

9.4%

6.8%

7.2%

6.0%

6.6%

4.0%

4.2%

7.0%

6.8%

6.3%

11.8%

***NOTE: #simulations = 1,000; λ = 25 for 10 years so n ~ 250; α=0.999
**

** 15% contamination used instead of 5%.

## 25% contamination used instead of 5%.

RMSE

RMSE

RCE

RCap

RCap RCE/MLE

StdDev

MLE

RCap

StdDev

StdDev

RCE

RCap

RCap RCE/MLE

$48

$29

$349

$371

$1,198

$1,281

$45

$59

$513

$581

$2,085

$1,856

76.5%

86.9%

87.3%

85.2%

85.8%

83.6%

77.8%

57.8%

71.4%

48.7%

64.6%

53.7%

$56

$32

$386

$418

$1,343

$1,469

$56

$98

$687

$1,146

$3,107

$3,326

$45

$29

$347

$368

$1,189

$1,271

$45

$59

$510

$580

$2,069

$1,853

80.1%

89.6%

89.9%

88.0%

88.5%

86.5%

80.1%

59.9%

74.2%

50.6%

66.6%

55.7%

$203

$122

$1,452

$1,554

$5,008

$5,393

$203

$360

$2,476

$3,759

$9,520

$10,530

$69

$62

$362

$300

$697

$572

$906

$202

$9,870

$661

$2,251

$1,030

$59

$54

$303

$261

$580

$495

$790

$96

$4,828

$464

$747

$777

85.4%

87.9%

83.8%

87.0%

83.3%

86.5%

87.1%

47.6%

48.9%

70.2%

33.2%

75.4%

$67

$60

$350

$292

$677

$557

$899

$195

$9,847

$641

$2,124

$998

$59

$54

$302

$260

$578

$493

$789

$96

$4,826

$461

$741

$772

87.5%

89.9%

86.1%

89.0%

85.4%

88.5%

87.8%

49.2%

49.0%

72.0%

34.9%

77.4%

$323

$353

$937

$1,105

$1,666

$1,859

$260

$296

$1,006

$1,147

$1,960

$2,479

$178

$171

$487

$538

$832

$875

$153

$166

$548

$599

$1,008

$1,219

55.2%

48.4%

52.0%

48.7%

49.9%

47.1%

58.8%

56.1%

54.5%

52.3%

51.4%

49.2%

$307

$336

$891

$1,051

$1,588

$1,770

$248

$284

$956

$1,096

$1,888

$2,393

$178

$170

$487

$538

$831

$874

$153

$166

$547

$599

$1,007

$1,216

57.8%

50.7%

54.6%

51.2%

52.3%

49.4%

61.5%

58.3%

57.3%

54.6%

53.3%

50.8%

PAGE 73 of 78

95%CIs

MLE

RCap

95%CIs

95%CIs

RCE

RCap

RCap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

RCap

IQR

IQR

RCE

RCap

RCap RCE/MLE

Skew

MLE

RCap

Skew

RCE

RCap

Kurtosis

MLE

RCap

Kurtosis

RCE

RCap

$169

$111

$1,330

$1,395

$4,518

$4,767

$169

$224

$1,865

$2,123

$6,968

$6,562

83.3%

91.2%

91.6%

89.8%

90.2%

88.4%

83.3%

62.3%

75.3%

56.5%

73.2%

62.3%

0.620

0.523

0.511

0.578

0.560

0.630

0.620

0.953

0.779

1.182

1.048

1.148

0.567

0.515

0.503

0.568

0.551

0.618

0.567

0.739

0.700

0.859

0.885

0.900

$57

$36

$427

$446

$1,447

$1,518

$57

$68

$616

$709

$2,076

$2,262

$49

$32

$385

$394

$1,285

$1,316

$49

$51

$488

$494

$1,614

$1,579

85.6%

89.8%

90.2%

88.2%

88.7%

86.7%

85.6%

75.6%

79.2%

69.6%

77.8%

69.8%

2.31

2.08

2.01

2.43

2.32

2.80

2.31

3.99

3.16

5.23

4.91

4.99

2.01

2.04

1.97

2.37

2.26

2.72

2.01

2.75

2.46

2.83

3.75

3.30

8.95

11.87

11.06

16.15

14.66

21.20

8.95

23.67

20.95

45.49

37.57

40.71

6.91

11.41

10.64

15.40

14.01

20.07

6.91

11.16

11.69

12.85

22.17

19.17

$257

$221

$1,356

$1,113

$2,340

$2,107

$932

$539

$3,331

$2,171

$6,347

$3,409

$227

$198

$1,159

$992

$2,027

$1,862

$471

$323

$1,456

$1,620

$2,705

$2,702

88.2%

89.6%

85.4%

89.2%

86.6%

88.4%

50.5%

60.0%

43.7%

74.6%

42.6%

79.2%

0.658

0.531

0.654

0.567

0.725

0.588

3.790

1.081

8.504

0.954

1.373

0.889

0.641

0.520

0.637

0.555

0.704

0.575

5.211

0.727

7.673

0.824

0.827

0.808

$67

$64

$346

$313

$607

$601

$173

$134

$699

$499

$1,264

$799

$60

$58

$302

$281

$525

$536

$95

$95

$366

$414

$748

$664

88.9%

91.1%

87.4%

90.0%

86.4%

89.1%

54.6%

70.5%

52.3%

83.0%

59.1%

83.1%

2.61

1.86

2.01

1.88

3.11

2.06

27.17

4.71

31.14

3.86

6.69

3.52

2.53

1.79

1.92

1.84

2.98

2.00

29.88

2.85

31.34

3.03

2.82

3.11

11.90

5.58

6.22

5.15

15.62

7.22

811.09

31.29

979.37

22.38

78.91

19.50

11.23

5.09

5.54

4.99

14.47

6.80

925.45

14.03

988.09

14.12

14.85

15.69

$1,025

$1,059

$3,052

$3,521

$5,261

$5,455

$912

$938

$3,231

$3,504

$5,529

$6,397

$600

$561

$1,726

$1,868

$2,926

$3,006

$565

$562

$1,959

$1,957

$3,130

$3,594

58.6%

52.9%

56.6%

53.1%

55.6%

55.1%

62.0%

60.0%

60.6%

55.9%

56.6%

56.2%

1.242

1.475

1.314

1.416

1.382

1.473

1.139

1.281

1.247

1.388

1.543

1.754

1.108

1.289

1.166

1.245

1.219

1.289

1.040

1.132

1.131

1.242

1.358

1.516

$216

$204

$595

$660

$1,042

$1,100

$180

$189

$662

$655

$993

$1,019

$139

$121

$368

$392

$633

$630

$119

$125

$415

$402

$616

$605

64.7%

59.2%

61.7%

59.4%

60.7%

57.2%

65.9%

66.1%

62.6%

61.4%

62.0%

59.4%

3.87

4.73

4.02

4.31

4.29

4.53

3.24

5.68

3.30

4.22

5.96

7.15

3.40

4.05

3.48

3.71

3.69

3.90

3.04

4.71

2.98

3.81

5.19

6.10

21.19

32.21

22.93

26.17

26.10

28.95

14.73

56.76

14.60

24.90

55.30

79.49

16.68

24.20

17.52

19.95

19.77

22.21

13.25

38.75

11.67

20.60

42.24

59.77

TABLE F9b

RCE vs. LDA for Economic Capital Estimation Under 5% Right-Tail Contamination ($m, λ = 25)*

Severity

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg**

24.5

TLogg

34.5

TLogg## 24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

ECap

Mean

MLE

ECap

MLE

Bias

MLE

Bias%

Mean

RCE

ECap

RCE

Bias

RCE

Bias%

RMSE

MLE

ECap

$107

$107

$1,286

$1,293

$4,230

$4,303

$126

$133

$1,267

$1,297

$4,208

$4,145

$155

$127

$1,523

$1,584

$5,137

$5,421

$155

$195

$1,753

$2,153

$6,408

$6,678

$48

$20

$237

$292

$907

$1,118

$30

$62

$486

$856

$2,200

$2,533

45.2%

19.1%

18.4%

22.6%

21.4%

26.0%

23.6%

46.6%

38.3%

66.0%

52.3%

61.1%

$133

$115

$1,383

$1,410

$4,595

$4,743

$133

$140

$1,397

$1,369

$4,822

$4,391

$26

$8

$97

$117

$366

$440

$7

$7

$130

$72

$614

$245

24.1%

7.8%

7.5%

9.0%

8.6%

10.2%

5.6%

5.5%

10.3%

5.5%

14.6%

5.9%

$120

$75

$872

$1,033

$3,241

$3,869

$114

$232

$1,629

$3,199

$8,217

$9,445

$192

$203

$1,064

$960

$1,877

$1,794

$271

$261

$1,164

$1,086

$1,928

$1,892

$238

$238

$1,329

$1,135

$2,372

$2,135

$703

$400

$4,748

$1,537

$4,297

$2,607

$46

$35

$266

$175

$495

$341

$432

$139

$3,584

$451

$2,369

$715

23.9%

17.0%

25.0%

18.2%

26.3%

19.0%

159.7%

53.2%

307.9%

41.5%

122.9%

37.8%

$211

$216

$1,154

$1,017

$2,046

$1,905

$394

$248

$1,978

$1,205

$1,863

$2,121

$18

$12

$91

$57

$169

$110

$124

-$13

$814

$119

-$65

$229

9.5%

6.2%

8.5%

6.0%

9.0%

6.2%

45.7%

-5.0%

70.0%

10.9%

-3.4%

12.1%

$382

$375

$1,106

$1,251

$1,938

$2,076

$351

$361

$1,267

$1,334

$2,088

$2,227

$745

$855

$2,268

$2,767

$4,121

$4,743

$623

$662

$2,517

$2,766

$4,377

$5,195

$362

$480

$1,162

$1,516

$2,183

$2,667

$272

$301

$1,250

$1,433

$2,289

$2,967

94.7%

127.8%

105.0%

121.2%

112.7%

128.5%

77.3%

83.4%

98.7%

107.4%

109.6%

133.2%

$421

$419

$1,199

$1,361

$2,080

$2,243

$370

$381

$1,376

$1,445

$2,264

$2,574

$38

$43

$92

$110

$142

$167

$19

$20

$110

$111

$176

$347

10.0%

11.5%

8.4%

8.8%

7.3%

8.0%

5.3%

5.5%

8.7%

8.3%

8.4%

15.6%

***NOTE: #simulations = 1,000; λ = 25 for 10 years so n ~ 250; α=0.9997
**

** 15% contamination used instead of 5%.

## 25% contamination used instead of 5%.

RMSE

RMSE

RCE

ECap

ECap RCE/MLE

StdDev

MLE

ECap

StdDev

StdDev

RCE

ECap

ECap RCE/MLE

$88

$64

$757

$874

$2,760

$3,206

$85

$116

$1,096

$1,303

$4,863

$4,384

73.6%

86.4%

86.8%

84.6%

85.2%

82.9%

74.6%

50.1%

67.3%

40.7%

59.2%

46.4%

$110

$72

$840

$991

$3,111

$3,703

$110

$223

$1,555

$3,083

$7,916

$9,099

$85

$64

$751

$866

$2,735

$3,176

$85

$116

$1,089

$1,301

$4,824

$4,377

77.0%

89.1%

89.4%

87.4%

87.9%

85.7%

77.0%

51.9%

70.0%

42.2%

60.9%

48.1%

$391

$268

$3,146

$3,653

$11,523

$13,459

$391

$777

$5,510

$9,216

$22,384

$27,395

$182

$145

$1,005

$735

$2,004

$1,439

$5,152

$554

$78,844

$1,796

$7,864

$2,793

$152

$125

$821

$629

$1,626

$1,221

$4,436

$189

$33,228

$1,105

$1,579

$1,942

83.6%

86.5%

81.7%

85.5%

81.1%

84.8%

86.1%

34.1%

42.1%

61.5%

20.1%

69.5%

$176

$141

$969

$714

$1,942

$1,398

$5,133

$536

$78,762

$1,739

$7,499

$2,700

$151

$125

$816

$626

$1,617

$1,216

$4,434

$188

$33,218

$1,099

$1,578

$1,928

85.8%

88.6%

84.2%

87.6%

83.3%

86.9%

86.4%

35.1%

42.2%

63.2%

21.0%

71.4%

$1,189

$1,627

$3,836

$5,045

$7,342

$8,997

$900

$1,113

$3,962

$4,904

$8,814

$12,102

$559

$650

$1,675

$2,033

$3,043

$3,470

$459

$528

$1,837

$2,154

$3,785

$4,880

47.0%

40.0%

43.7%

40.3%

41.4%

38.6%

51.0%

47.4%

46.4%

43.9%

42.9%

40.3%

$1,133

$1,555

$3,655

$4,812

$7,010

$8,592

$858

$1,072

$3,759

$4,690

$8,511

$11,733

$558

$649

$1,672

$2,030

$3,039

$3,466

$459

$528

$1,834

$2,152

$3,781

$4,868

49.3%

41.7%

45.8%

42.2%

43.4%

40.3%

53.5%

49.2%

48.8%

45.9%

44.4%

41.5%

PAGE 74 of 78

95%CIs

MLE

ECap

95%CIs

95%CIs

RCE

ECap

ECap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

ECap

IQR

IQR

RCE

ECap

ECap RCE/MLE

Skew

MLE

ECap

Skew

RCE

ECap

Kurtosis

MLE

ECap

Kurtosis

RCE

ECap

$316

$239

$2,819

$3,201

$10,160

$11,586

$316

$429

$3,940

$4,795

$15,736

$15,340

80.9%

89.3%

89.6%

87.6%

88.2%

86.1%

80.9%

55.2%

71.5%

52.0%

70.3%

56.0%

0.708

0.565

0.551

0.625

0.606

0.683

0.708

1.145

0.887

1.432

1.235

1.362

0.638

0.556

0.543

0.614

0.595

0.670

0.638

0.826

0.779

0.950

1.000

0.997

$104

$78

$924

$1,039

$3,306

$3,737

$104

$134

$1,292

$1,591

$4,589

$5,303

$87

$70

$833

$920

$2,941

$3,254

$87

$96

$1,001

$1,036

$3,488

$3,523

83.3%

89.9%

90.2%

88.5%

88.9%

87.1%

83.3%

71.5%

77.4%

65.1%

76.0%

66.4%

2.65

2.39

2.30

2.83

2.68

3.29

2.65

4.78

3.88

6.66

5.84

6.06

2.25

2.34

2.26

2.75

2.62

3.19

2.25

2.94

2.83

3.06

4.22

3.64

11.58

15.86

14.72

21.87

19.76

29.05

11.58

34.11

32.01

72.84

51.84

57.58

8.56

15.22

14.15

20.83

18.87

27.46

8.56

12.70

15.71

14.99

27.39

23.07

$666

$508

$3,706

$2,697

$6,583

$5,220

$2,834

$1,337

$10,042

$5,537

$19,566

$9,079

$573

$453

$3,130

$2,386

$5,586

$4,546

$1,065

$630

$2,896

$3,848

$5,575

$6,624

86.1%

89.1%

84.5%

88.5%

84.9%

87.1%

37.6%

47.1%

28.8%

69.5%

28.5%

73.0%

0.740

0.593

0.729

0.630

0.819

0.655

7.302

1.340

16.587

1.131

1.745

1.036

0.718

0.579

0.707

0.615

0.790

0.638

11.241

0.759

16.790

0.912

0.847

0.909

$168

$142

$915

$738

$1,635

$1,421

$444

$302

$1,912

$1,194

$3,550

$1,936

$146

$127

$791

$647

$1,387

$1,273

$190

$186

$711

$937

$1,562

$1,561

86.9%

89.3%

86.5%

87.7%

84.8%

89.6%

42.8%

61.6%

37.2%

78.5%

44.0%

80.6%

2.95

2.10

2.27

2.06

3.52

2.31

30.11

5.57

31.54

4.52

9.02

4.05

2.85

2.01

2.15

2.01

3.36

2.24

31.23

3.07

31.60

3.21

3.07

3.44

14.86

7.19

7.97

6.18

19.42

9.01

935.40

42.29

996.57

29.62

132.89

25.19

13.93

6.52

7.03

5.94

17.86

8.40

983.28

16.94

998.89

15.57

18.36

18.98

$3,487

$4,591

$11,760

$14,885

$21,907

$24,631

$3,044

$3,265

$12,050

$13,991

$22,898

$27,632

$1,792

$2,027

$5,646

$6,672

$10,180

$11,151

$1,623

$1,682

$6,352

$6,589

$10,671

$13,122

51.4%

44.1%

48.0%

44.8%

46.5%

45.3%

53.3%

51.5%

52.7%

47.1%

46.6%

47.5%

1.522

1.818

1.612

1.739

1.701

1.811

1.378

1.620

1.494

1.695

1.944

2.258

1.327

1.549

1.395

1.492

1.461

1.545

1.241

1.386

1.332

1.489

1.670

1.891

$653

$734

$1,965

$2,385

$3,650

$4,195

$524

$573

$2,143

$2,259

$3,446

$3,692

$376

$383

$1,076

$1,242

$1,930

$2,119

$315

$336

$1,201

$1,224

$1,887

$1,894

57.5%

52.2%

54.8%

52.1%

52.9%

50.5%

60.1%

58.5%

56.0%

54.2%

54.8%

51.3%

4.63

5.64

4.88

5.20

5.20

5.45

3.83

7.48

3.86

4.99

7.34

8.99

3.99

4.78

4.16

4.43

4.42

4.64

3.56

5.90

3.42

4.49

6.27

7.58

29.42

43.61

32.90

36.82

36.98

40.30

20.66

93.28

20.09

33.95

81.48

119.45

22.45

32.59

24.65

27.73

27.76

30.48

18.32

58.49

15.44

28.04

59.87

88.69

TABLE F10a

RCE vs. LDA for Regulatory Capital Estimation Under 5% Left-Tail Contamination ($m, λ=25)*

Severity

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg## 24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD**

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

RCap

Mean

MLE

RCap

MLE

Bias

MLE

Bias%

Mean

RCE

RCap

RCE

Bias

RCE

Bias%

RMSE

MLE

RCap

$63

$53

$649

$603

$2,012

$1,893

$76

$76

$670

$643

$2,085

$1,956

$64

$56

$682

$646

$2,145

$2,062

$85

$98

$826

$857

$2,737

$2,652

$1

$3

$33

$43

$133

$169

$9

$22

$157

$214

$652

$697

2.1%

5.5%

5.1%

7.2%

6.6%

8.9%

11.6%

28.8%

23.4%

33.4%

31.3%

35.6%

$60

$51

$623

$579

$1,933

$1,821

$75

$74

$680

$612

$2,154

$1,889

-$2

-$2

-$25

-$23

-$78

-$72

-$2

-$1

$10

-$31

$69

-$67

-3.8%

-3.9%

-3.9%

-3.9%

-3.9%

-3.8%

-2.0%

-1.9%

1.5%

-4.8%

3.3%

-3.4%

$25

$29

$348

$375

$1,206

$1,309

$53

$101

$738

$926

$3,254

$3,317

$85

$100

$444

$448

$766

$818

$124

$130

$495

$510

$801

$867

$97

$109

$505

$493

$876

$902

$222

$168

$806

$630

$1,244

$1,074

$11

$9

$62

$45

$109

$85

$98

$39

$311

$120

$443

$208

13.0%

9.2%

13.9%

10.0%

14.3%

10.3%

79.5%

29.9%

62.8%

23.6%

55.3%

24.0%

$87

$100

$447

$448

$771

$817

$142

$125

$425

$525

$684

$912

$1

$0

$4

$0

$5

-$1

$18

-$5

-$70

$15

-$117

$45

1.5%

0.3%

0.9%

0.0%

0.7%

-0.1%

14.7%

-3.8%

-14.2%

3.0%

-14.6%

5.2%

$149

$121

$391

$403

$643

$636

$141

$140

$452

$451

$698

$717

$216

$195

$590

$650

$993

$1,036

$206

$189

$676

$678

$1,129

$1,128

$67

$75

$199

$247

$350

$401

$65

$49

$224

$227

$432

$411

45.0%

61.7%

51.0%

61.5%

54.4%

63.0%

45.8%

34.9%

49.6%

50.3%

61.9%

57.3%

$141

$114

$367

$381

$595

$590

$138

$126

$429

$419

$686

$675

-$8

-$6

-$24

-$22

-$48

-$45

-$3

-$14

-$23

-$32

-$12

-$42

-5.2%

-5.3%

-6.2%

-5.4%

-7.5%

-7.1%

-2.0%

-10.1%

-5.1%

-7.1%

-1.7%

-5.9%

***NOTE: #simulations = 1,000; λ = 25 for 10 years so n ~ 250; α=0.999
**

** 10% contamination instead of 5%.

## 25% contamination used instead of 5%.

RMSE

RMSE

RCE

RCap

RCap RCE/MLE

StdDev

MLE

RCap

StdDev

StdDev

RCE

RCap

RCap RCE/MLE

95%CIs

MLE

RCap

95%CIs

95%CIs

RCE

RCap

RCap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

RCap

$23

$26

$313

$329

$1,065

$1,127

$42

$53

$524

$520

$2,040

$1,831

93.5%

89.6%

89.9%

87.8%

88.4%

86.1%

79.4%

52.4%

71.0%

56.2%

62.7%

55.2%

$25

$29

$347

$372

$1,198

$1,298

$52

$99

$721

$900

$3,188

$3,242

$23

$26

$312

$328

$1,062

$1,125

$42

$53

$524

$519

$2,039

$1,830

93.2%

89.7%

90.0%

88.2%

88.7%

86.7%

80.5%

53.6%

72.6%

57.6%

64.0%

56.4%

$93

$106

$1,266

$1,337

$4,322

$4,592

$189

$276

$2,304

$3,166

$9,160

$9,669

$87

$96

$1,147

$1,186

$3,855

$4,009

$153

$178

$1,788

$1,899

$6,699

$6,401

93.7%

90.2%

90.6%

88.7%

89.2%

87.3%

80.8%

64.7%

77.6%

60.0%

73.1%

66.2%

0.388

0.521

0.509

0.577

0.559

0.630

0.612

1.015

0.873

1.051

1.165

1.222

0.384

0.513

0.501

0.567

0.549

0.618

0.561

0.715

0.771

0.848

0.947

0.969

$30

$33

$391

$403

$1,312

$1,358

$53

$69

$580

$645

$2,051

$1,980

$28

$30

$355

$359

$1,174

$1,192

$45

$51

$460

$452

$1,597

$1,425

$65

$57

$336

$291

$630

$541

$591

$180

$1,380

$641

$2,250

$920

$56

$51

$285

$257

$531

$473

$490

$93

$447

$446

$653

$687

86.1%

88.8%

84.8%

88.2%

84.3%

87.5%

83.0%

51.6%

32.4%

69.5%

29.0%

74.7%

$64

$56

$330

$288

$620

$535

$582

$176

$1,344

$630

$2,206

$896

$56

$51

$285

$257

$531

$473

$490

$93

$441

$446

$643

$685

87.3%

90.0%

86.2%

89.2%

85.6%

88.5%

84.2%

52.8%

32.8%

70.7%

29.1%

76.5%

$226

$216

$1,261

$1,057

$2,250

$2,049

$959

$519

$3,194

$1,972

$5,169

$3,141

$200

$193

$1,092

$942

$1,961

$1,803

$474

$304

$1,238

$1,516

$1,858

$2,470

88.4%

89.3%

86.6%

89.1%

87.2%

88.0%

49.4%

58.5%

38.8%

76.9%

36.0%

78.6%

0.664

0.519

0.653

0.584

0.709

0.592

2.619

1.044

1.667

1.000

1.774

0.834

0.645

0.509

0.636

0.573

0.689

0.579

3.450

0.744

1.038

0.849

0.939

0.751

$59

$59

$323

$296

$570

$560

$143

$132

$636

$455

$964

$824

$275

$296

$804

$987

$1,422

$1,580

$272

$236

$1,014

$936

$1,943

$1,795

$156

$147

$430

$491

$730

$764

$159

$140

$558

$502

$1,003

$916

56.6%

49.7%

53.5%

49.7%

51.3%

48.4%

58.4%

59.3%

55.0%

53.7%

51.6%

51.1%

$267

$287

$779

$955

$1,378

$1,529

$264

$231

$989

$908

$1,894

$1,747

$156

$147

$429

$490

$728

$763

$159

$139

$557

$501

$1,003

$915

58.3%

51.3%

55.2%

51.3%

52.8%

49.9%

60.2%

60.3%

56.4%

55.2%

53.0%

52.4%

$886

$891

$2,605

$2,972

$4,498

$4,825

$894

$742

$3,353

$3,022

$5,193

$5,160

$545

$489

$1,496

$1,628

$2,519

$2,569

$570

$459

$1,938

$1,785

$2,987

$2,905

61.5%

54.8%

57.4%

54.8%

56.0%

53.3%

63.8%

61.8%

57.8%

59.1%

57.5%

56.3%

1.237

1.468

1.319

1.469

1.387

1.475

1.285

1.222

1.462

1.338

1.677

1.549

1.103

1.286

1.171

1.287

1.223

1.292

1.149

1.105

1.299

1.196

1.462

1.357

$177

$159

$494

$533

$842

$857

$173

$155

$537

$548

$913

$919

PAGE 75 of 78

IQR

IQR

RCE

RCap

RCap RCE/MLE

Skew

MLE

RCap

Skew

RCE

RCap

Kurtosis

MLE

RCap

Kurtosis

RCE

RCap

93.3%

90.5%

90.8%

89.1%

89.5%

87.8%

84.5%

73.9%

79.3%

70.1%

77.9%

72.0%

1.46

2.23

2.15

2.63

2.49

3.05

2.62

5.32

3.89

3.89

7.47

5.70

1.44

2.18

2.10

2.56

2.43

2.96

2.28

2.87

3.12

3.00

5.09

3.96

6.13

14.22

13.21

19.50

17.65

25.77

14.74

43.35

25.93

25.33

92.10

52.65

5.98

13.63

12.69

18.56

16.84

24.35

11.21

14.59

16.51

15.87

45.06

27.05

$52

$54

$284

$265

$496

$492

$83

$91

$319

$375

$503

$678

89.0%

90.8%

87.8%

89.7%

87.1%

87.9%

58.3%

68.9%

50.2%

82.3%

52.2%

82.3%

2.86

1.65

1.99

2.42

3.02

2.11

17.83

5.87

8.06

5.95

12.16

2.94

2.75

1.60

1.91

2.40

2.92

2.07

23.52

3.92

5.89

5.06

5.60

2.47

13.53

3.92

5.85

11.32

15.40

7.12

411.12

64.96

96.75

59.69

227.64

13.34

12.63

3.70

5.28

11.29

14.53

6.84

641.75

36.53

60.93

49.38

58.78

9.91

$113

$95

$303

$317

$506

$493

$115

$101

$337

$338

$555

$545

63.6%

59.6%

61.4%

59.5%

60.1%

57.5%

66.6%

65.2%

62.8%

61.6%

60.8%

59.3%

3.92

4.67

4.14

4.68

4.41

4.62

4.35

4.06

5.69

3.97

7.77

5.98

3.47

4.04

3.62

4.05

3.81

4.00

3.78

3.77

5.00

3.62

6.69

5.12

22.03

30.71

24.70

30.79

27.97

30.51

29.45

23.69

51.06

20.76

101.10

55.57

17.52

23.59

19.15

23.68

21.39

23.59

22.10

20.84

39.99

17.57

78.70

41.61

TABLE F10b

RCE vs. LDA for Economic Capital Estimation Under 5% Left-Tail Contamination ($m, λ = 25)*

Severity

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg## 24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD**

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

ECap

Mean

MLE

ECap

MLE

Bias

MLE

Bias%

Mean

RCE

ECap

RCE

Bias

RCE

Bias%

RMSE

MLE

ECap

$107

$107

$1,286

$1,293

$4,230

$4,303

$126

$133

$1,267

$1,297

$4,208

$4,145

$110

$114

$1,367

$1,405

$4,570

$4,765

$145

$185

$1,644

$1,869

$5,910

$6,099

$3

$7

$81

$112

$340

$462

$19

$52

$377

$572

$1,702

$1,954

2.8%

6.7%

6.3%

8.7%

8.0%

10.7%

15.3%

39.3%

29.7%

44.1%

40.4%

47.1%

$103

$103

$1,243

$1,252

$4,094

$4,177

$124

$130

$1,303

$1,232

$4,433

$4,021

-$4

-$4

-$43

-$41

-$135

-$126

-$2

-$3

$36

-$65

$224

-$124

-3.5%

-3.3%

-3.3%

-3.1%

-3.2%

-2.9%

-1.3%

-2.2%

2.9%

-5.0%

5.3%

-3.0%

$46

$64

$755

$885

$2,784

$3,290

$103

$239

$1,702

$2,354

$8,521

$9,060

$192

$203

$1,064

$960

$1,877

$1,794

$271

$261

$1,164

$1,086

$1,928

$1,892

$224

$227

$1,252

$1,082

$2,218

$2,031

$630

$371

$2,232

$1,436

$3,467

$2,488

$32

$24

$188

$122

$341

$237

$359

$110

$1,068

$350

$1,539

$596

16.5%

11.7%

17.7%

12.7%

18.2%

13.2%

132.8%

41.9%

91.8%

32.2%

79.8%

31.5%

$198

$206

$1,088

$971

$1,916

$1,812

$344

$234

$824

$1,124

$1,381

$2,016

$6

$3

$24

$11

$39

$18

$73

-$27

-$340

$37

-$547

$124

2.9%

1.3%

2.3%

1.1%

2.1%

1.0%

27.1%

-10.5%

-29.2%

3.4%

-28.4%

6.6%

$382

$375

$1,106

$1,251

$1,938

$2,076

$351

$361

$1,267

$1,334

$2,088

$2,227

$637

$718

$1,939

$2,390

$3,500

$4,014

$591

$553

$2,207

$2,322

$4,035

$4,133

$254

$343

$833

$1,139

$1,563

$1,938

$240

$192

$940

$988

$1,947

$1,906

66.5%

91.3%

75.3%

91.0%

80.7%

93.4%

68.2%

53.2%

74.2%

74.1%

93.2%

85.5%

$364

$356

$1,037

$1,186

$1,787

$1,923

$349

$323

$1,211

$1,231

$2,091

$2,101

-$19

-$19

-$69

-$66

-$150

-$153

-$2

-$38

-$55

-$103

$3

-$126

-4.9%

-5.1%

-6.3%

-5.2%

-7.8%

-7.4%

-0.6%

-10.5%

-4.4%

-7.7%

0.1%

-5.7%

***NOTE: #simulations = 1,000; λ = 25 for 10 years so n ~ 250; α=0.9997
**

** 10% contamination instead of 5%.

## 25% contamination used instead of 5%.

RMSE

RMSE

RCE

ECap

ECap RCE/MLE

StdDev

MLE

ECap

StdDev

StdDev

RCE

ECap

ECap RCE/MLE

$43

$57

$674

$769

$2,436

$2,800

$79

$102

$1,131

$1,158

$4,806

$4,343

93.0%

88.8%

89.2%

86.9%

87.5%

85.1%

76.1%

42.5%

66.5%

49.2%

56.4%

47.9%

$46

$64

$751

$878

$2,763

$3,257

$101

$233

$1,659

$2,283

$8,349

$8,846

$43

$57

$672

$768

$2,433

$2,797

$79

$102

$1,131

$1,156

$4,800

$4,342

92.8%

89.2%

89.5%

87.5%

88.0%

85.9%

77.4%

43.5%

68.1%

50.6%

57.5%

49.1%

$171

$230

$2,711

$3,103

$9,824

$11,312

$358

$599

$5,182

$7,926

$20,903

$24,136

$171

$133

$931

$716

$1,802

$1,360

$2,787

$497

$4,992

$1,776

$8,408

$2,483

$144

$116

$768

$620

$1,479

$1,166

$2,374

$187

$1,085

$1,073

$1,462

$1,690

84.1%

87.3%

82.6%

86.5%

82.1%

85.7%

85.2%

37.7%

21.7%

60.4%

17.4%

68.1%

$168

$131

$911

$706

$1,770

$1,339

$2,764

$484

$4,877

$1,741

$8,266

$2,410

$144

$116

$768

$620

$1,479

$1,165

$2,373

$185

$1,030

$1,072

$1,356

$1,685

85.6%

88.7%

84.3%

87.8%

83.6%

87.0%

85.9%

38.3%

21.1%

61.6%

16.4%

69.9%

$1,001

$1,346

$3,256

$4,483

$6,195

$7,557

$971

$855

$4,158

$3,918

$8,964

$8,286

$483

$552

$1,460

$1,839

$2,636

$2,993

$486

$434

$1,932

$1,763

$3,843

$3,492

48.2%

41.0%

44.8%

41.0%

42.6%

39.6%

50.0%

50.8%

46.5%

45.0%

42.9%

42.1%

$968

$1,301

$3,147

$4,336

$5,994

$7,304

$941

$833

$4,050

$3,791

$8,750

$8,064

$482

$552

$1,458

$1,838

$2,632

$2,989

$486

$433

$1,931

$1,760

$3,843

$3,490

49.8%

42.4%

46.3%

42.4%

43.9%

40.9%

51.6%

51.9%

47.7%

46.4%

43.9%

43.3%

PAGE 76 of 78

95%CIs

MLE

ECap

95%CIs

95%CIs

RCE

ECap

ECap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

ECap

IQR

IQR

RCE

ECap

ECap RCE/MLE

Skew

MLE

ECap

Skew

RCE

ECap

Kurtosis

MLE

ECap

Kurtosis

RCE

ECap

$158

$204

$2,406

$2,689

$8,569

$9,624

$286

$348

$3,732

$4,178

$15,066

$14,824

92.3%

88.4%

88.7%

86.7%

87.2%

85.1%

79.8%

58.1%

72.0%

52.7%

72.1%

61.4%

0.420

0.563

0.550

0.625

0.605

0.684

0.701

1.259

1.009

1.222

1.413

1.450

0.415

0.554

0.541

0.613

0.594

0.670

0.634

0.780

0.867

0.939

1.083

1.080

$55

$70

$833

$929

$2,963

$3,314

$97

$139

$1,213

$1,442

$4,522

$4,625

$51

$62

$739

$806

$2,586

$2,827

$80

$97

$930

$959

$3,443

$3,102

92.6%

88.3%

88.7%

86.8%

87.3%

85.3%

82.9%

69.6%

76.7%

66.5%

76.1%

67.1%

1.65

2.58

2.48

3.08

2.91

3.62

3.08

6.44

4.64

4.46

9.22

6.78

1.63

2.52

2.43

2.99

2.84

3.50

2.61

2.94

3.54

3.29

5.89

4.38

7.97

19.12

17.71

26.58

23.96

35.53

20.27

59.90

36.27

32.62

132.02

70.89

7.78

18.32

17.00

25.27

22.83

33.52

14.76

15.85

20.95

19.13

58.19

32.61

$569

$494

$3,405

$2,570

$6,253

$5,075

$2,925

$1,327

$9,990

$5,098

$15,646

$8,178

$495

$442

$2,898

$2,248

$5,258

$4,428

$1,142

$579

$2,694

$3,455

$4,054

$6,061

87.0%

89.4%

85.1%

87.5%

84.1%

87.2%

39.0%

43.7%

27.0%

67.8%

25.9%

74.1%

0.750

0.578

0.728

0.652

0.798

0.659

4.387

1.307

2.185

1.212

2.384

0.969

0.726

0.565

0.706

0.638

0.772

0.643

6.897

0.793

1.250

0.954

0.982

0.836

$144

$132

$852

$694

$1,519

$1,319

$360

$296

$1,677

$1,097

$2,651

$1,977

$128

$119

$741

$610

$1,295

$1,173

$171

$177

$618

$846

$1,017

$1,572

88.9%

90.5%

87.0%

87.8%

85.3%

88.9%

47.7%

59.9%

36.8%

77.1%

38.4%

79.5%

3.22

1.83

2.23

2.72

3.43

2.34

22.70

7.68

9.71

6.99

15.16

3.46

3.10

1.77

2.13

2.68

3.30

2.28

27.83

4.67

9.50

5.76

5.53

2.73

16.65

4.88

7.44

14.04

19.41

8.65

599.55

104.18

129.78

76.69

323.75

17.98

15.51

4.57

6.65

13.89

18.17

8.23

828.72

52.17

154.87

62.48

53.12

12.13

$3,064

$3,716

$9,942

$12,387

$18,064

$21,356

$3,024

$2,475

$12,655

$11,971

$20,662

$21,228

$1,646

$1,718

$4,819

$5,726

$8,640

$9,449

$1,629

$1,336

$6,284

$6,065

$10,129

$10,201

53.7%

46.2%

48.5%

46.2%

47.8%

44.2%

53.9%

54.0%

49.7%

50.7%

49.0%

48.1%

1.520

1.812

1.623

1.815

1.712

1.820

1.592

1.507

1.835

1.633

2.169

1.951

1.326

1.549

1.406

1.550

1.473

1.554

1.391

1.339

1.594

1.430

1.838

1.661

$536

$577

$1,626

$1,924

$2,948

$3,265

$497

$461

$1,730

$1,901

$3,159

$3,294

$304

$296

$867

$988

$1,533

$1,623

$298

$270

$955

$1,023

$1,688

$1,706

56.7%

51.4%

53.3%

51.3%

52.0%

49.7%

60.0%

58.7%

55.2%

53.8%

53.4%

51.8%

4.73

5.58

5.05

5.58

5.37

5.60

5.39

4.86

6.99

4.62

10.01

7.38

4.10

4.78

4.33

4.79

4.59

4.78

4.53

4.45

6.09

4.16

8.64

6.22

31.39

41.94

35.94

42.02

40.26

43.16

43.82

33.19

74.85

27.53

156.71

81.17

24.13

32.11

27.15

32.20

30.46

32.90

31.38

28.30

58.29

22.73

124.03

59.19

TABLE F11a

RCE vs. LDA for Regulatory Capital Estimation Under 5% Right, 5%Left-Tail Contamination ($m, λ=25)*

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

RCap

Mean

MLE

RCap

MLE

Bias

MLE

Bias%

Mean

RCE

RCap

RCE

Bias

RCE

Bias%

RMSE

MLE

RCap

$63

$53

$649

$603

$2,012

$1,893

$76

$76

$670

$643

$2,085

$1,956

$67

$59

$721

$688

$2,280

$2,207

$89

$102

$863

$959

$2,818

$2,844

$4

$6

$73

$85

$269

$313

$13

$26

$193

$316

$733

$888

6.7%

11.7%

11.2%

14.1%

13.3%

16.5%

17.2%

34.7%

28.9%

49.2%

35.1%

45.4%

$63

$54

$659

$616

$2,054

$1,947

$78

$78

$709

$652

$2,231

$2,008

$0

$1

$10

$14

$42

$54

$2

$2

$39

$9

$146

$53

0.6%

1.7%

1.6%

2.3%

2.1%

2.8%

2.7%

2.9%

5.8%

1.4%

7.0%

2.7%

$26

$32

$375

$407

$1,306

$1,428

$60

$104

$802

$1,454

$3,125

$3,429

$85

$100

$444

$448

$766

$818

$124

$130

$495

$510

$801

$867

$100

$112

$524

$506

$916

$928

$230

$178

$872

$658

$1,336

$1,097

$15

$12

$80

$58

$149

$110

$106

$49

$377

$148

$535

$231

17.6%

12.3%

18.1%

13.0%

19.5%

13.4%

85.5%

37.6%

76.2%

29.0%

66.8%

26.6%

$90

$103

$464

$460

$806

$840

$145

$130

$457

$552

$752

$936

$5

$3

$20

$12

$40

$22

$21

$1

-$38

$42

-$49

$70

5.6%

3.1%

4.6%

2.7%

5.2%

2.6%

17.0%

0.7%

-7.6%

8.3%

-6.2%

8.0%

$149

$121

$391

$403

$643

$636

$141

$140

$452

$451

$698

$717

$235

$215

$643

$712

$1,082

$1,133

$219

$221

$770

$759

$1,138

$1,268

$87

$94

$252

$309

$439

$497

$78

$80

$318

$307

$441

$551

58.3%

78.1%

64.5%

76.8%

68.2%

78.3%

55.3%

57.2%

70.3%

68.1%

63.1%

76.9%

$153

$125

$397

$414

$645

$642

$147

$145

$482

$464

$698

$753

$4

$4

$6

$12

$2

$6

$5

$4

$30

$12

$0

$36

3.0%

3.7%

1.6%

2.9%

0.2%

1.0%

3.9%

3.2%

6.6%

2.7%

0.0%

5.0%

*NOTE: #simulations = 1,000; λ = 25 for 10 years so n ~ 250; α=0.999

RMSE

RMSE

RCE

RCap

RCap RCE/MLE

StdDev

MLE

RCap

StdDev

StdDev

RCE

RCap

RCap RCE/MLE

$24

$28

$331

$351

$1,133

$1,208

$47

$57

$557

$605

$2,041

$1,866

91.9%

87.9%

88.3%

86.2%

86.8%

84.6%

77.8%

55.1%

69.5%

41.6%

65.3%

54.4%

$26

$31

$368

$398

$1,278

$1,394

$59

$101

$778

$1,419

$3,037

$3,312

$24

$28

$331

$350

$1,133

$1,207

$47

$57

$555

$605

$2,036

$1,866

93.1%

89.6%

90.0%

88.1%

88.6%

86.6%

79.6%

56.9%

71.4%

42.6%

67.0%

56.3%

$99

$114

$1,365

$1,452

$4,685

$5,017

$226

$320

$2,463

$3,583

$8,555

$11,047

$70

$59

$356

$299

$704

$559

$543

$244

$1,581

$613

$2,541

$906

$60

$52

$299

$262

$589

$485

$445

$118

$537

$454

$938

$696

85.6%

88.2%

84.1%

87.6%

83.6%

86.9%

81.9%

48.5%

34.0%

74.2%

36.9%

76.9%

$69

$58

$347

$293

$688

$548

$533

$239

$1,536

$595

$2,484

$876

$60

$52

$299

$261

$587

$485

$444

$118

$536

$452

$936

$693

87.4%

90.0%

86.2%

89.2%

85.4%

88.5%

83.4%

49.5%

34.9%

76.1%

37.7%

79.1%

$303

$331

$880

$1,096

$1,554

$1,731

$286

$307

$1,341

$1,126

$1,565

$1,938

$169

$162

$464

$536

$786

$825

$165

$172

$698

$581

$835

$986

55.8%

49.0%

52.7%

48.9%

50.6%

47.7%

57.6%

56.2%

52.0%

51.6%

53.3%

50.9%

$291

$317

$843

$1,051

$1,491

$1,657

$276

$296

$1,302

$1,083

$1,501

$1,858

$169

$162

$464

$536

$786

$825

$165

$172

$697

$581

$835

$986

58.2%

51.1%

55.0%

51.0%

52.7%

49.8%

59.8%

58.2%

53.5%

53.7%

55.6%

53.0%

PAGE 77 of 78

95%CIs

MLE

RCap

95%CIs

95%CIs

RCE

RCap

RCap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

RCap

IQR

IQR

RCE

RCap

RCap RCE/MLE

Skew

MLE

RCap

Skew

RCE

RCap

Kurtosis

MLE

RCap

Kurtosis

RCE

RCap

$93

$103

$1,232

$1,285

$4,168

$4,369

$178

$206

$1,880

$2,140

$6,329

$6,805

93.6%

90.0%

90.3%

88.5%

88.9%

87.1%

78.7%

64.3%

76.3%

59.7%

74.0%

61.6%

0.390

0.523

0.510

0.579

0.561

0.632

0.656

0.986

0.901

1.480

1.078

1.165

0.385

0.515

0.503

0.569

0.551

0.620

0.596

0.734

0.784

0.928

0.912

0.929

$31

$35

$416

$431

$1,400

$1,456

$55

$72

$587

$668

$1,948

$2,233

$29

$31

$374

$381

$1,242

$1,269

$47

$54

$472

$481

$1,542

$1,578

92.3%

89.5%

89.8%

88.4%

88.8%

87.2%

84.7%

74.9%

80.4%

72.1%

79.1%

70.7%

1.46

2.22

2.14

2.62

2.49

3.04

2.83

4.64

4.86

8.37

6.34

4.38

1.44

2.18

2.10

2.55

2.43

2.95

2.51

2.71

3.68

3.75

4.91

2.98

6.08

14.12

13.12

19.37

17.53

25.61

13.49

37.03

43.70

102.69

66.54

30.22

5.93

13.53

12.60

18.42

16.72

24.18

10.61

12.00

24.26

22.80

42.98

12.87

$248

$219

$1,326

$1,118

$2,332

$2,068

$938

$573

$3,573

$2,053

$5,528

$3,270

$218

$196

$1,139

$984

$2,017

$1,816

$530

$320

$1,485

$1,589

$2,139

$2,611

87.9%

89.4%

85.9%

88.0%

86.5%

87.8%

56.5%

55.8%

41.6%

77.4%

38.7%

79.9%

0.683

0.521

0.661

0.579

0.751

0.590

2.319

1.338

1.760

0.904

1.859

0.798

0.664

0.510

0.644

0.568

0.729

0.578

3.067

0.905

1.171

0.820

1.246

0.740

$65

$62

$334

$310

$613

$549

$156

$121

$692

$518

$1,012

$813

$57

$57

$297

$270

$540

$494

$86

$90

$328

$423

$542

$676

88.1%

91.8%

89.1%

87.2%

88.1%

89.9%

55.5%

74.4%

47.4%

81.8%

53.6%

83.1%

2.94

1.66

2.05

2.28

3.57

2.18

16.99

9.61

7.61

3.53

11.34

2.41

2.84

1.61

1.97

2.26

3.43

2.13

23.30

6.94

6.54

3.20

11.46

2.23

14.19

4.00

6.21

10.08

21.15

7.60

400.47

142.23

80.18

21.50

187.34

8.50

13.33

3.79

5.61

10.08

19.67

7.27

645.03

87.47

66.51

18.18

210.41

7.56

$999

$1,005

$2,918

$3,350

$4,946

$5,462

$880

$934

$3,510

$3,188

$4,788

$6,149

$606

$545

$1,594

$1,806

$2,709

$2,788

$585

$557

$2,061

$1,862

$2,799

$3,326

60.7%

54.2%

54.6%

53.9%

54.8%

51.0%

66.4%

59.7%

58.7%

58.4%

58.5%

54.1%

1.235

1.473

1.310

1.476

1.377

1.463

1.258

1.342

1.692

1.428

1.319

1.465

1.105

1.293

1.167

1.294

1.219

1.286

1.125

1.189

1.447

1.254

1.196

1.309

$199

$181

$542

$603

$933

$992

$179

$178

$628

$672

$963

$1,035

$127

$104

$334

$347

$552

$556

$118

$115

$392

$410

$583

$614

64.0%

57.6%

61.6%

57.6%

59.1%

56.0%

65.9%

64.8%

62.5%

61.1%

60.5%

59.4%

3.78

4.69

3.96

4.74

4.26

4.49

4.09

4.50

10.81

5.23

3.88

4.57

3.36

4.05

3.48

4.10

3.72

3.91

3.70

4.01

8.52

4.38

3.55

4.04

20.19

31.66

22.28

32.37

25.82

28.47

24.33

28.12

199.20

42.92

22.39

31.88

16.18

23.99

17.37

24.63

19.97

22.24

20.59

22.80

134.44

30.28

18.89

24.64

TABLE F11b

RCE vs. LDA for Economic Capital Estimation Under 5% Right, 5%Left-Tail Contamination ($m, λ=25)*

Dist.

Parm1

µ

LogN

10

LogN

7.7

LogN

10.4

LogN

9.27

LogN

10.75

LogN

9.63

TLogN

10.2

TLogN

9

TLogN

10.7

TLogN

9.4

TLogN

11

TLogN

10

a

Logg

24

Logg

33

Logg

25

Logg

34.5

Logg

25.25

Logg

34.7

TLogg

23.5

TLogg

33

TLogg

24.5

TLogg

34.5

TLogg

24.75

TLogg

34.6

ξ

GPD

0.8

GPD

0.95

GPD

0.875

GPD

0.95

GPD

0.925

GPD

0.99

TGPD

0.775

TGPD

0.8

TGPD

0.8675

TGPD

0.91

TGPD

0.92

0.95

TGPD

σ

2

2.55

2.5

2.77

2.7

2.97

1.95

2.2

2.385

2.65

2.6

2.8

b

2.65

3.3

2.5

3.15

2.45

3.07

2.65

3.3

2.5

3.15

2.45

3.07

θ

35,000

7,500

47,500

25,000

50,000

27,500

33,500

25,000

50,000

31,000

47,500

35,000

True

ECap

Mean

MLE

ECap

MLE

Bias

MLE

Bias%

Mean

RCE

ECap

RCE

Bias

RCE

Bias%

RMSE

MLE

ECap

$107

$107

$1,286

$1,293

$4,230

$4,303

$126

$133

$1,267

$1,297

$4,208

$4,145

$115

$121

$1,451

$1,502

$4,876

$5,118

$153

$194

$1,722

$2,154

$6,059

$6,579

$8

$14

$165

$209

$646

$815

$27

$61

$455

$857

$1,850

$2,434

7.8%

13.4%

12.8%

16.2%

15.3%

18.9%

21.7%

45.8%

35.9%

66.0%

44.0%

58.7%

$108

$109

$1,319

$1,337

$4,365

$4,482

$130

$137

$1,362

$1,321

$4,589

$4,289

$1

$3

$33

$44

$135

$179

$5

$4

$95

$24

$381

$144

1.2%

2.7%

2.6%

3.4%

3.2%

4.2%

3.9%

3.3%

7.5%

1.9%

9.1%

3.5%

$49

$70

$817

$964

$3,027

$3,603

$119

$240

$1,874

$4,206

$7,956

$9,318

$192

$203

$1,064

$960

$1,877

$1,794

$271

$261

$1,164

$1,086

$1,928

$1,892

$234

$234

$1,301

$1,114

$2,329

$2,090

$639

$400

$2,455

$1,498

$3,815

$2,537

$42

$31

$238

$153

$452

$296

$368

$139

$1,291

$412

$1,887

$645

21.6%

15.0%

22.3%

16.0%

24.1%

16.5%

136.1%

53.3%

110.9%

37.9%

97.9%

34.1%

$207

$212

$1,130

$999

$2,009

$1,864

$340

$247

$898

$1,190

$1,573

$2,074

$14

$9

$66

$39

$132

$70

$69

-$14

-$267

$104

-$356

$182

7.4%

4.3%

6.2%

4.0%

7.0%

3.9%

25.6%

-5.5%

-22.9%

9.6%

-18.4%

9.6%

$382

$375

$1,106

$1,251

$1,938

$2,076

$351

$361

$1,267

$1,334

$2,088

$2,227

$704

$801

$2,137

$2,650

$3,853

$4,437

$634

$663

$2,582

$2,651

$3,987

$4,713

$321

$426

$1,031

$1,398

$1,916

$2,361

$283

$302

$1,316

$1,317

$1,899

$2,486

83.9%

113.4%

93.2%

111.8%

98.9%

113.7%

80.5%

83.7%

103.9%

98.8%

90.9%

111.6%

$399

$394

$1,135

$1,304

$1,955

$2,111

$372

$379

$1,390

$1,384

$2,099

$2,377

$17

$19

$29

$53

$18

$35

$21

$18

$123

$50

$11

$150

4.4%

5.1%

2.6%

4.2%

0.9%

1.7%

5.8%

5.0%

9.7%

3.8%

0.5%

6.7%

*NOTE: #simulations = 1,000; λ = 25 for 10 years so n ~ 250; α=0.9997

RMSE

RMSE

RCE

ECap

ECap RCE/MLE

StdDev

MLE

ECap

StdDev

StdDev

RCE

ECap

ECap RCE/MLE

$45

$61

$717

$824

$2,605

$3,017

$88

$111

$1,212

$1,364

$4,782

$4,406

91.5%

87.3%

87.7%

85.5%

86.1%

83.7%

74.5%

46.3%

64.7%

32.4%

60.1%

47.3%

$49

$68

$800

$941

$2,958

$3,510

$116

$232

$1,817

$4,117

$7,738

$8,995

$45

$61

$716

$823

$2,602

$3,011

$88

$111

$1,208

$1,364

$4,766

$4,404

92.8%

89.1%

89.5%

87.4%

88.0%

85.8%

76.4%

47.8%

66.5%

33.1%

61.6%

49.0%

$181

$247

$2,902

$3,343

$10,567

$12,246

$445

$694

$5,385

$8,757

$19,963

$28,334

$185

$139

$989

$735

$2,037

$1,407

$2,465

$742

$5,805

$1,627

$10,543

$2,399

$155

$120

$811

$632

$1,657

$1,198

$2,102

$256

$1,286

$1,097

$2,702

$1,719

83.7%

86.7%

82.0%

86.0%

81.4%

85.2%

85.3%

34.4%

22.1%

67.4%

25.6%

71.7%

$180

$135

$960

$719

$1,986

$1,375

$2,437

$729

$5,659

$1,574

$10,373

$2,311

$154

$120

$808

$631

$1,652

$1,196

$2,101

$255

$1,258

$1,092

$2,678

$1,710

85.6%

88.6%

84.2%

87.8%

83.2%

87.0%

86.2%

35.0%

22.2%

69.4%

25.8%

74.0%

$1,109

$1,514

$3,579

$5,018

$6,795

$8,311

$1,022

$1,147

$6,016

$4,916

$6,618

$8,807

$528

$613

$1,586

$2,031

$2,860

$3,257

$506

$548

$2,577

$2,106

$2,984

$3,742

47.6%

40.5%

44.3%

40.5%

42.1%

39.2%

49.5%

47.7%

42.8%

42.8%

45.1%

42.5%

$1,061

$1,452

$3,427

$4,819

$6,519

$7,968

$982

$1,106

$5,871

$4,736

$6,340

$8,449

$528

$613

$1,585

$2,031

$2,860

$3,257

$505

$547

$2,574

$2,105

$2,984

$3,739

49.7%

42.2%

46.3%

42.1%

43.9%

40.9%

51.5%

49.5%

43.8%

44.4%

47.1%

44.3%

PAGE 78 of 78

95%CIs

MLE

ECap

95%CIs

95%CIs

RCE

ECap

ECap RCE/MLE

CV

MLE

CV

RCE

IQR

MLE

ECap

IQR

IQR

RCE

ECap

ECap RCE/MLE

Skew

MLE

ECap

Skew

RCE

ECap

Kurtosis

MLE

ECap

Kurtosis

RCE

ECap

$168

$220

$2,598

$2,930

$9,315

$10,555

$335

$398

$3,983

$4,740

$14,205

$15,565

92.6%

89.2%

89.5%

87.7%

88.2%

86.2%

75.2%

57.3%

74.0%

54.1%

71.2%

54.9%

0.422

0.565

0.551

0.627

0.607

0.686

0.756

1.199

1.055

1.912

1.277

1.367

0.417

0.556

0.543

0.615

0.596

0.672

0.677

0.808

0.887

1.032

1.039

1.027

$57

$74

$876

$981

$3,126

$3,515

$99

$140

$1,243

$1,498

$4,282

$5,206

$54

$67

$796

$874

$2,800

$3,081

$83

$101

$961

$1,010

$3,313

$3,509

93.5%

90.5%

90.8%

89.1%

89.6%

87.6%

83.7%

72.4%

77.3%

67.4%

77.4%

67.4%

1.65

2.58

2.47

3.07

2.90

3.61

3.23

5.76

5.98

10.69

7.53

5.23

1.62

2.52

2.42

2.99

2.83

3.49

2.81

2.70

4.21

4.06

5.67

3.22

7.91

19.00

17.60

26.42

23.82

35.34

17.49

56.19

64.76

156.41

88.00

42.69

7.72

18.19

16.88

25.10

22.68

33.32

13.18

11.14

31.17

26.36

54.80

14.97

$650

$509

$3,588

$2,722

$6,463

$5,191

$2,863

$1,466

$10,711

$5,400

$17,336

$8,524

$550

$450

$3,070

$2,369

$5,481

$4,514

$1,280

$611

$3,249

$3,767

$4,406

$6,382

84.7%

88.4%

85.6%

87.0%

84.8%

87.0%

44.7%

41.7%

30.3%

69.8%

25.4%

74.9%

0.770

0.579

0.738

0.646

0.853

0.658

3.813

1.821

2.305

1.051

2.719

0.911

0.746

0.566

0.715

0.632

0.822

0.642

6.180

1.034

1.401

0.918

1.703

0.824

$158

$137

$874

$717

$1,653

$1,343

$396

$277

$1,887

$1,241

$2,733

$1,968

$139

$124

$760

$632

$1,410

$1,187

$178

$178

$618

$964

$1,143

$1,564

87.9%

90.4%

86.9%

88.1%

85.3%

88.4%

44.8%

64.4%

32.8%

77.7%

41.8%

79.5%

3.28

1.84

2.29

2.56

4.05

2.42

23.14

12.49

9.04

4.11

15.79

2.71

3.16

1.79

2.19

2.53

3.87

2.35

28.29

8.97

8.17

3.57

18.01

2.44

17.25

4.97

7.83

12.51

26.26

9.27

638.93

218.19

108.19

28.75

328.59

10.59

16.10

4.67

6.99

12.41

24.23

8.79

855.18

133.34

96.40

22.34

435.49

9.12

$3,502

$4,326

$11,343

$14,421

$19,904

$23,923

$2,935

$3,266

$13,331

$12,491

$18,525

$26,750

$1,831

$1,989

$5,256

$6,412

$9,416

$10,500

$1,677

$1,656

$6,710

$6,249

$9,553

$11,880

52.3%

46.0%

46.3%

44.5%

47.3%

43.9%

57.1%

50.7%

50.3%

50.0%

51.6%

44.4%

1.508

1.813

1.604

1.819

1.692

1.796

1.549

1.669

2.274

1.787

1.590

1.793

1.323

1.554

1.397

1.557

1.463

1.543

1.359

1.444

1.852

1.521

1.422

1.573

$597

$660

$1,842

$2,166

$3,273

$3,767

$529

$532

$2,084

$2,333

$3,366

$3,800

$340

$330

$974

$1,099

$1,688

$1,816

$309

$307

$1,130

$1,224

$1,782

$1,960

57.0%

49.9%

52.9%

50.7%

51.6%

48.2%

58.5%

57.8%

54.3%

52.5%

52.9%

51.6%

4.51

5.58

4.79

5.64

5.15

5.39

4.86

5.34

14.74

6.60

4.61

5.55

3.93

4.77

4.14

4.83

4.44

4.64

4.35

4.68

11.50

5.39

4.21

4.83

28.12

43.03

31.97

43.87

36.70

39.80

33.45

38.41

323.63

65.93

31.11

46.92

21.78

32.29

24.38

33.08

27.99

30.52

27.94

30.31

219.01

45.09

26.22

35.21

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