The Quantification of Operational Risk
Preprint
- 1 November 2003
- preprint
- Published by Elsevier BV in SSRN Electronic Journal
Abstract
We examine the quantification of operational risk for banks. We adopt a financial economics approach and interpret operational risk management as a means of optimizing the profitability of an institution along its value chain. We start by defining operational risk and then propose a framework to model risk mitigation through the bank's value chain over time. Using analytical and numerical methods, we obtain answers concerning capital allocation, network stability, risk figures, and diversification issues. Interpreting the results shows that the usual intuition gained from market and credit risk does not apply to the quantification of operational risk.Keywords
This publication has 5 references indexed in Scilit:
- Operational risk: a practitioner's viewJournal of Risk, 2003
- Functional correlation approach to operational risk in banking organizationsPhysica A: Statistical Mechanics and its Applications, 2003
- Cyclical Correlations, Credit Contagion, and Portfolio LossesSSRN Electronic Journal, 2003
- Random Perturbations of Hamiltonian SystemsPublished by Springer Science and Business Media LLC ,1998
- Absolute stability of global pattern formation and parallel memory storage by competitive neural networksIEEE Transactions on Systems, Man, and Cybernetics, 1983