I've read that a hybrid approach combing scenario analysis and loss distribution analysis can be used to calculate operational risk capital under the advanced models approach. I've read a couple ways this can be implemented and am not clear on the difference.

They sound the same to me:

  1. Generate a hybrid distribution (I'm assuming this is the loss severity distribution) where expected losses are comprised of historical internal losses (commensurate with the LDA approach) and use scenario analysis for the right hand side of the distribution.

  2. Use scenario analysis to "stress" the model producing a more appropriate distribution

  3. Develop loss frequency and severity distributions from the data pool based on a combination of internal historical losses and scenario analysis.

Can someone explain the difference? In LDA, we use a loss frequency and a loss severity distribution created from internal historical data. If we are not using different data to create the distributions, what other means are there to shock the model using scenario analysis?


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