Modelling Operational Risk by AMA Essay Example | Topics and Well Written Essays - 1250 words

Modelling Operational Risk by AMA - Essay Example Lavin and Scherrish (1999) stressed that these statistical procedures are always expressed as the random vector of data based on risk cells that have specified density for a given vector of the parameter. Â  Shevchenko (2011) associated that Bayesian inference to a number of advantages, for which they are used to model operational risk. A typical example of this is what Embrechts and Puccetti (2008) noted to be the consistency and convenience associated with the statistical framework used in quantifying uncertainties. As a quantitative approach, the outcomes with Bayesian inference are always guaranteed to be the same whenever the similar variables are used. This makes the outcomes with Bayesian inference highly reliable and consistent among a similar set of operational variables within a bank (Lambrigger, Shevchenko, and WÃ ¼thrich, 2007 and Neil, Fenton and Tailor, 2005). What is more, Shevchenko (2011) acknowledged the fact that the Bayesian inference is highly accommodating and versatile as it incorporates expert opinions with historical internal and external data used in various operational risk estimations (Burnecki, Kukla and Taylor, 2005). Â  Even though the Bayesian inference has several strengths and advantages for usage, Shevchenko (2010) lamented that the approach’s over-reliance on scenario analysis and expert judgment acts as a major setback for usage within a good number of firms. Adding to this, Wasserman (1997) and Alderweireld, Garcia and LÃ ©onard (2006) agreed that even though both scenario analysis and expert judgement provide important information for forecasting and decision making, banks with the relatively limited dataset and those that only started a business may not have enough of these to use the Bayesian inference.