30 ms·
Not clear why the losses should follow lognormal distribution rather than some less pleasant to work with distribution like Cauchy. Also not clear why loss fre
by pps43 7y ago
Not clear why the losses should follow lognormal distribution rather than some less pleasant to work with distribution like Cauchy.
Also not clear why loss frequency is assumed to be independent from loss magnitude.
Instead of "percent chance that the loss will exceed X" (VaR), expected shortfall would be more useful.
- jacques_chester 7y agoThe distribution comes from PERT 3-point estimates. LEF and LEM are built of lower factors that roll up, which to my mind at least seem independent. I'm not sure what you meant by expected shortfall.
- bernardv 7y agoThe choice of distribution is subjective, especially if you little data to start with and are going on theoretical grounds. Agree on expected shortfall/TVaR.