Advanced Search
MyIDEAS: Login to save this article or follow this journal

Operational risk

Contents:

Author Info

  • Jarrow, Robert A.

Abstract

This paper provides an economic and mathematical characterization of operational risk useful for clarifying the issues related to estimation and the determination of economic capital. The insights for this characterization originate in the corporate finance literature. Operational risk is subdivided into two types, either: (i) the risk of a loss due to the firm's operating technology, or (ii) the risk of a loss due to agency costs. These two types of operational risks generate loss processes with different economic characteristics. We argue that the current methodology for the determination of economic capital for operational risk is overstated. It is biased high because the computation omits the bank's net present value (NPV) generating process. We also show that although it is conceptually possible to estimate the operational risk processes' parameters using only market prices, the non-observability of the firm's value makes this an unlikely possibility, except in rare cases. Instead, we argue that data internal to the firm, in conjunction with standard hazard rate estimation procedures, provides a more fruitful alternative.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6VCY-4PNFV72-3/1/c864a73fe498374cd07aa132e775d97a
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 5 (May)
Pages: 870-879

as in new window
Handle: RePEc:eee:jbfina:v:32:y:2008:i:5:p:870-879

Contact details of provider:
Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Kabir Dutta & Jason Perry, 2006. "A tale of tails: an empirical analysis of loss distribution models for estimating operational risk capital," Working Papers 06-13, Federal Reserve Bank of Boston.
  2. Antje Berndt & Rohan Douglas & Darrell Duffie & Mark Ferguson & David Schranz, 2005. "Measuring default risk premia from default swap rates and EDFs," BIS Working Papers 173, Bank for International Settlements.
  3. Chavez-Demoulin, V. & Embrechts, P. & Neslehova, J., 2006. "Quantitative models for operational risk: Extremes, dependence and aggregation," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2635-2658, October.
  4. Marco Moscadelli, 2004. "The modelling of operational risk: experience with the analysis of the data collected by the Basel Committee," Temi di discussione (Economic working papers) 517, Bank of Italy, Economic Research and International Relations Area.
  5. R. Jarrow & A. Purnanandam, 2007. "The valuation of a firm’s investment opportunities: a reduced form credit risk perspective," Review of Derivatives Research, Springer, vol. 10(1), pages 39-58, January.
  6. Joost Driessen, 2005. "Is Default Event Risk Priced in Corporate Bonds?," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 165-195.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Wang, Zongrun & Wang, Wuchao & Chen, Xiaohong & Jin, Yanbo & Zhou, Yanju, 2012. "Using BS-PSD-LDA approach to measure operational risk of Chinese commercial banks," Economic Modelling, Elsevier, vol. 29(6), pages 2095-2103.
  2. Robert Jarrow & Jeff Oxman & Yildiray Yildirim, 2010. "The cost of operational risk loss insurance," Review of Derivatives Research, Springer, vol. 13(3), pages 273-295, October.
  3. Robert Jarrow, 2007. "A Critique of Revised Basel II," Journal of Financial Services Research, Springer, vol. 32(1), pages 1-16, October.
  4. Chiarella, Carl & Fanelli, Viviana & Musti, Silvana, 2011. "Modelling the evolution of credit spreads using the Cox process within the HJM framework: A CDS option pricing model," European Journal of Operational Research, Elsevier, vol. 208(2), pages 95-108, January.
  5. Dahen, Hela & Dionne, Georges, 2010. "Scaling models for the severity and frequency of external operational loss data," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1484-1496, July.
  6. Eirik Gaard Kristiansen, 2005. "Strategic bank monitoring and firms’ debt structure," Working Paper 2005/10, Norges Bank.
  7. Wickens, Michael R, 2003. "Microeconomic Sources of Equity Risk," CEPR Discussion Papers 4070, C.E.P.R. Discussion Papers.
  8. Peter N Smith & Michael R Wickens, . "Asset Pricing with Observable Stochastic Discount Factors," Discussion Papers 02/03, Department of Economics, University of York.
  9. Viviana Fanelli & Silvana Musti, 2007. "Modelling Credit Spreads evolution using the Cox Process within the HJM framework," Quaderni DSEMS 27-2007, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
  10. Fiordelisi, Franco & Soana, Maria-Gaia & Schwizer, Paola, 2013. "The determinants of reputational risk in the banking sector," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1359-1371.
  11. Silvana Musti & Viviana Fanelli, 2008. "Modelling electricity forward curve dynamics in the Italian market," Quaderni DSEMS 20-2008, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:32:y:2008:i:5:p:870-879. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.