An improved measurement method of operational risk based on Monte Carlo simulation

Operational risk measurement is one of the most important research areas of risk management in recent years. Compared with the traditional qualitative methods, quantitative measurement methods of operational risk will be more accuracy. In this paper, According to the Basel III advanced measurement approach, we generate the frequent and severity distribution from historic loss event data at first, then using Monte Carlo method to simulate the future loss distribution and computing the operational risk capital. Through the empirical experiments, the proposed method is better than the traditional methods.