A Dynamical Approach to Operational Risk Measurement
AbstractWe propose a dynamical model for the estimation of Operational Risk in banking institutions. Operational Risk is the risk that a financial loss occurs as the result of failed processes. Examples of operational losses are the ones generated by internal frauds, human errors or failed transactions. In order to encompass the most heterogeneous set of processes, in our approach the losses of each process are generated by the interplay among random noise, interactions with other processes and the efforts the bank makes to avoid losses. We show how some relevant parameters of the model can be estimated from a database of historical operational losses, validate the estimation procedure and test the forecasting power of the model. Some advantages of our approach over the traditional statistical techniques are that it allows to follow the whole time evolution of the losses and to take into account different-time correlations among the processes.
Download InfoIf 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.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1202.2532.
Date of creation: Feb 2012
Date of revision:
Publication status: Published in Journal of Operational Risk 6-1 (2011), pp. 3-19
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
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.:
- R. G. Cowell & R. J. Verrall & Y. K. Yoon, 2007. "Modeling Operational Risk With Bayesian Networks," Journal of Risk & Insurance, The American Risk and Insurance Association, The American Risk and Insurance Association, vol. 74(4), pages 795-827.
- Kartik Anand & Reimer K\"uhn, 2006. "Phase Transitions in Operational Risk," Papers physics/0609130, arXiv.org, revised Dec 2006.
- Cornalba, Chiara & Giudici, Paolo, 2004. "Statistical models for operational risk management," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 338(1), pages 166-172.
- Kühn, Reimer & Neu, Peter, 2003. "Functional correlation approach to operational risk in banking organizations," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 322(C), pages 650-666.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.