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The Power Law

Power law is very useful in evaluating the nature of the tails of a given distribution in extreme value theory.
 

This law is very useful in analysis of operational risk because most of the operational risk losses are likely to occur in the tails

 

Insurance

  • There are many insurance companies which provide insurance for operational risk
  • There are two main issues faced by such insurance companies:
    • Adverse Selection
    • Moral Hazard

 





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