Operational Risk Measurement: A Nonparametric Approach Using Cornish-Fisher Expansion

The severity loss distribution is the main topic in operational risk estimation. In this paper, we propose a novel model for quantifying operational risk in the framework of the loss distribution approach (LDA) as suggested by the Basel II. We use Cornish-Fisher Expansion, which is non-parameter method, to fit operational risk loss severity, and then we use simulation technique to measure the operational risk in the framework of LDA. We use this approach to measure the operational risk of Chinese commercial banking. Empirical analysis shows that this approach allows the allocation of capital in an efficient way.