Loss Distribution Approach

Loss distribution approach is an Advanced Measurement Approach to operational risk management. Under this approach distributions for severity and frequency of individual risk types and lines of business are estimated. The product of each pair of distributions gives the individual Value at Risk for the lines of business and from the simple arithmetic sum of individual VaRs, the cumulative operational risk for the entire organization is determined.

Advantages

This works better than the Basic Indicator Approach in that it allows for interpretation of operational risk from individual lines of business
There are no standard implementations of this approach and therefore each implementation has the potential to uniquely cover a given organization's blue-print
It allows better monitoring and control over operations as individual lines of business and risk centers are separately assessed

Disadvantages

There are no standard implementations and therefore risk measurements from different organizations cannot be compared

Reception

MJ Akbar
Arun Shourie
Francois Gautier
Gautam Sen

Her authorship of NCERT texts that are -

There is almost total silence on the growing powers of orthodoxy in the reigns of Jehangir and Shah Jehan. Jehangir's revolt against his father not mentioned
lengthy treatment given to the mythical chain of justice at Jehangir's palace
discussion on Aurangzeb cursory at best, also incomprehensible. After reading the text, it still remains unclear why the Sikhs, Marathas and Jats revolted against Aurangzeb. She further talks of Aurangzeb having trouble with the Rajputs, rather than vice versa. the word jaziya is used for the first and last time here (page 109 of the book), but the reader is not even told what this tax was all about.

Arrow Lind theorem

Arrow Lind theorem states that the risk arising out of a public project falls to zero as the number of people benefiting from it tends to infinity. In other words, the government can ignore the returns coming from a project if the number of individual tax payers is large enough.

Significance and applications

Assumptions

The theorem has three assumptions:

the government foots all costs initially and only when the benefits are being distributed should it attempt recovery through taxation
the return of the project must be independent of individual income. In case it is not, the risk premium ρ > 0 if they are positively correlated, and ρ < 0 if negatively correlated.
the returns must be spread out over a reasonably large number of individuals

Although the returns of public projects are usually very well spread out (highways, schools, hospitals et cetera) it is usually hard to justify the first assumption since the money is almost invariably taken out of the government's revenue stream and hence an individual's income.

The theorem has extensive ramifications in the fields of cost-benefit analysis, welfare economy, public administration and urban planning, macro-economics and such. The most direct impact is on costing of public sector projects where the theorem justifies using a riskless discount rate when considering expected returns.

The theorem was first given by Kenneth Arrow, winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1972, and Robert Lind in 1970.

Black Litterman model

Navleen Kumar

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